
Book " CA5~ 



61st Congress \ ct?-vta<t>u / Document 

2d Session ) SENATE j No. 507 



NATIONAL MONETARY COMMISSION 



Renewal of Reichsbank 
Charter 



in 



7f 



Washington : Government Printing Office : 1910 



ir 



61st Congress \ SENATE i DocUMENT 

2d Session J \ No. 507 



NATIONAL MONETARY COMMISSION 



as 

Renewal of Reichsbank 
Charter 






il# 



Washington : Government Printing Office : 1910 



NATIONAL MONETARY COMMISSION. 



Nelson W. Aldrich, Rhode Island, Chairman. 
Edward B. Vreeland, New York, V ice-Chairman. 



Julius C. Burrows, Michigan. 
Eugene Hale, Maine. 
Philander C. Knox, Pennsylvania. 
Theodore E. Burton, Ohio. 
John W. Daniel, Virginia. 
Henry M. Teller, Colorado. 
Hernando D. Money, Mississippi. 
Joseph W. Bailey, Texas. 



Jesse Overstreet, Indiana. 
John W. Weeks, Massachusetts. 
Robert W. Bonynge, Colorado. 
Sylvester C. Smith, California. 
Lemuel P. Padgett, Tennessee. 
George F. Burgess, Texas. 
Arsene P. Pujo, Louisiana. 
Arthur B. Shelton, Secretary. 



A. Piatt Andrew, Special Assistant to Commission. 



JUN IS 1910 



TABLE OF CONTENTS. 



Page. 
I. Results of the German Bank Inquiry of 1908 (articles pub- 
lished in the ' ' Frankfurter Zeitung ' ' during December, 1 908) _ 5 
II. Draft of a bill for the amendment of the German bank act 

with explanations 79 

III. Excerpts from the proceedings of the Third German Bankers' 

Convention, held in Hamburg in September, 1907 — The 
discussion of deposit banking (speeches by Dr. Jaffe, Dr. 
Damme, Dr . Solomonsohn, Max Schinckel, and Geh. Mueller) _ 123 

IV. Credit at the Reichsbank. By Dr. R. Koch, former president 

of the Reichsbank 201 

V. Concerning the collateral loan business of the Reichsbank, 
especially the lending on imperial and state securities. By 

Dr. R. Koch, former president of the Reichsbank 217 

VI. Concerning the renewal of the Reichsbank privilege. By Prof. 

W. Lexis 231 

VII. Concerning the renewal of the privilege of the Reichsbank 
and of the private note banks. By Dr. Moriz Stroell, director 

of the Bayerische Notenbank 243 

VIII. Law of June 1, 1909, amending the Bank Act 261 



I 

Results of the German Bank Inquiry 
of 1908 



[Articles published in the Frankfurter Zeitung during December, 1908] 



RESULTS OF THE GERMAN BANK 
INQUIRY OF 1908. 

I. THE INQUIRY COMMISSION — WHAT CAUSED THE MONE- 
TARY STRINGENCY GERMANY'S FOREIGN TRADE — 

THE NATIONAL WEAI/TH OF GERMANY — THE DEMAND 
FOR CAPITAL AND CREDIT MONEY. 

The bank act confers upon the State the right to revoke 
the charter of the Reichsbank on January i, 1891, and 
at intervals of ten years after that date upon one year's 
notice. The charter, therefore, cannot be revoked before 
January 1, 191 1, notice having been given not later than 
January 1, 19 10. Recommendations for the renewal 
of the charter have to be submitted by the Imperial 
Government to the Reichstag during the session 1908-9, 
which has just opened. The Government appointed 
last April a representative commission which was intrusted 
with the examination of a large number of experts. The 
inquiry commenced on May 1 and was conducted in such 
an efficient manner that the hearing of the experts was 
concluded during the same month. Since then, after 
sifting the material and collecting additional data, the 
commission on October 12 began to wind up its labors, 
finishing on October 19. The results became known the 
same day through an inspired press notice which appeared 
with our comments in the second morning edition of the 
Frankfurter Zeitung for October 20 and 2 1 . Full informa- 
tion may be expected by the public from the discussions 



National Monetary C ommis s to 



n 



of the proposed measure in the Reichstag, from the 
amendments to the bank act which have now been drawn 
up by the Imperial Government and from the explanation 
of these amendments, and also from the minutes of the 
inquiry commission, which will most likely accompany 
the Government's proposals. The statements of the 
expert witnesses, in accordance with a promise given 
them, will not be published, nor is it at present intended 
to prepare a summary of the deliberations of the commis- 
sion. The publication of the minutes just as they stand 
will, it true, make it more difficult for one to inform 
oneself of u: main points by a rapid glance; at the same 
time, it will enable the careful reader to get at the com- 
plete arguments pro and con, and weigh them against 
each other, instead of depending solely on a count of votes. 
How far the Imperial Government will embody in its 
draft of the proposed measures the results of the inquiry, 
and how far the Reichstag will approve or alter this draft, 
are questions for the future. It will be remembered that, 
although more time and work had been devoted to the 
problems of the bourse inquiry fifteen years ago — the 
commission then appointed rendered a very full report 
containing well-considered proposals — yet the Govern- 
ment materially changed the proposals of the commis- 
sion and the Reichstag in its turn "improved for the 
worse" the plans presented by the Government. This 
time the problems are much simpler and clearer, at least as 
far as the work of the commission goes. Nevertheless the 
members of the commission were asked to remain silent for 
a while; but the problems put before them have lately 



Renewal of Reichsb ank Charter 

been discussed so thoroughly and generally that beyond 
the meagre information given out for publication one may 
easily acquire a definite and interesting knowledge of the 
whole question. 

The valuable and very comprehensive statistics com- 
piled by the Reichsbank for the purposes of the inquiry 
have also helped to enlighten a wider circle of the public. 
We are therefore of the opinion that we shall broaden and 
deepen the general interest in these important questions 
if now, upon the conclusion of the inquiry, we follow up 
our comments on the questions put to the inquiry com- 
mission (cfr. Frankfurter Zeitung, April 26 to May 12, 
1908) with our observations on the work of the commis- 
sion and on the subject-matter of the inquiry. 

It is generally recognized that the deliberations of the 
commission under the chairmanship of the president of 
the Reichsbank, Mr. Havenstein, were conducted on all 
sides very impartially, even when opinions were widely 
divergent; consequently, such refining of views and 
such an elucidation of the pros and cons of the questions 
have been reached by the opposing groups that very 
beneficial results may be expected therefrom by all con- 
cerned, more particularly by the Imperial Government and 
the Reichstag. In so far as a change of views took place, 
it must be ascribed to the slackening of the demand for 
credit facilities and to the fall in interest rates which has 
meanwhile occurred. Had this taken place a year ago an 
inquiry would perhaps not have been instituted at all. 
At least up to the year 1907 it seemed that the inquiry into 
banking matters which had been promised was to consist 



National Monetary C ommis s to 



n 



merely of the examination of a few expert witnesses — ■ 
especially of some men who had already advocated certain 
changes. But when, during the year 1907, in spite of a 
gradual lessening of the industrial activity, the monetary 
stringency increased, and at last our bank rate reached 
its record figure of 7^ per cent, the public as well as the 
Reichstag became fairly alarmed. 

This apprehension has since considerably subsided, owing 
to easier money markets and the enlightening influence of 
the bank inquiry. The popular view has more and more 
come in line with that so long expressed by the Frankfurter 
Zeitung that the strain on the money market and rise of 
interest rates have not been caused through any inade- 
quacy of the Reichsbank, nor through mistakes of its man- 
agement nor through lack of currency, but principally 
through a steadily increasing disproportion between the 
supply and demand of capital. Moreover, we have long 
ago shown that the stringency and its effect were not con- 
fined to ourselves alone, but were international, although 
it must be admitted that Germany was especially hard hit. 
With us the transition to a commercial and industrial na- 
tion has made and is making rapid strides; in particular 
the large industries have made signal progress. The result 
is that wealth, capital, and credit have quickly grown, but 
more money has also been locked up in new plants and in- 
vestments ; the standard of living, wages, and prices have 
also risen, and the demand for capital has created a corre- 
spondingly high demand for circulating media . Yet our eco- 
nomic policy, as we have shown on former occasions, does 
not favor the formation of new capital, but rather retards it 



Renewal of Reichsb ank Charter 



through high tariffs and their exploitation by the industrial 
combines (cartels) , through weakening the effectiveness of 
the stock exchange and through other legislative blunders. 
All these subjects were omitted from the list of questions 
submitted to the inquiry commission, and were therefore not 
fully discussed by it. The statistical material contains 
very little information concerning them, but we now add a 
few figures showing the development during the last two 
decades. The events of more recent times will be discussed 
later on. 

Our foreign trade with the principal countries, taking 
together the import and export of goods (excluding pre- 
cious metals) shows the following changes since 1889: 

[In millions of dollars; $1=4.20 marks.] 



Country. 



Germany 

France 

England 

United States 



$3,682 
2, 235 
4.767 
3.346 



1889. 



Increase, 
1907. 



$1. 703 

1. 546 

2, 966 

1. 597 



$1,979 

688 

1, 800 

1. 749 



Per cent of 
increase. 



116. 2 
44- 4 
60. 1 

109. 6 



As will be seen from the above, Germany's trade has in- 
creased much more than that of France and England, and 
even a little more than the trade of the new country, the 
United States. Besides this growth of Germany's foreign 
trade a heavy increase of the domestic trade must be taken 
into account, which was bound to create an increased de- 
mand for capital, money, and credit. More significant still 
is the difference influencing the international balance of 
payments. Looking at imports and exports separately, and 
taking the excess of imports over exports, we find that the 
amount owed by Germany for goods imported from abroad 



National Monetary Commission 



has grown much more than the corresponding item in other 
countries, while in the United States the amount to be 
received for exported goods has risen enormously; and 
whereas in the United States the excess of exports dur- 
ing 1907 does not mark a record (the years 1898, 1900, 
and 1 90 1 having shown a greater excess) the excess of 
imports into Germany has had a steady upward trend and 
reached its highest mark during the year 1907. 

[In millions of dollars; $1=4 20 marks ] 



1907 


1889. 


Increase 
( + ) or de- 
crease (— ) 
for 1907. 


Excess of imports into — 

Germany 


• 

! $411.5 

. 97.5 


$196.4 
118. 2 
S45-o 

56.6 


+ $215.1 
— 20. 7 
+ 76.3 

+ 443-5 


England 

Excess of exports — 

United States .. 


621.3 





How far during this period the increasing demand for 
currency necessary to settle balances was met by cur- 
rency-saving devices will to some extent be evident in 
the next table. Concerning Germany this table covers 
collections passed through the clearing-houses of the 
Reichsbank, and one-half of the turnover effected without 
actual cash payments ; concerning France the table shows 
one-half of the turnover effected in "compensations" of 
the Parisian bankers; England is represented by the col- 
lections passed through the London Clearing House; the 
United States by the collections passed through the New 
York Clearing House. This table does not show the 
clearings outside of the principal banking centers of the 
United States and England, nor does it show the increased 



Renewal of Reichsb ank Charter 



saving of currency resulting from the use of postal orders, 
checks, etc. 



[In millions of dollars; §1=4.20 marks.] 



Germany 

France 

England 

United States 



$37,050.9 

2.534-5 

61.924.3 

87. 182. 1 



$10, 884. 5 

487.8 

37.059.7 

34.798.8 



Increase, 
1907. 



$26, 166. 4 

2, 046. 7 

24, 864. 6 

52,383.3 



In spite of certain disadvantages Germany, as will be 
seen, shows some marked progress, thanks to the ener- 
getic efforts of the Reichsbank, but a good deal remains 
still to be desired. There is no doubt that the wealth of 
Germany has considerably increased. When, toward the 
end of 1893, Schmoller made an estimate for the stock- 
exchange inquiry commission he thought it likely that 
the savings of the German nation amounted then to 
between 2 and 2% billions of marks ($500,000,000 to 
$625,000,000) annually, of which 1 billion ($250,000,000) 
went into investment securities. Since then in Prussia 
alone taxable incomes exceeding $750.00 had grown 
from $726,050,000 in 1892 to $1,371,520,000 in 1907. 
The deposits in the German savings banks (at the end 
of 1907, $3,307,000,000) have, during the last decade, 
increased by a yearly average of about $143,000,000. 
Therefore, the annual savings of the German nation must 
to-day be taken as far exceeding those of 1893 or 1889. 
Recent estimates put the annual savings of Germany be- 
tween $625,000,000 and $750,000,000, the Grenzboten of 
July 9, 1908, even rating them as high as $1,000,000,000. 
On the other hand, capital, too, has been in increasing 

13 



National Monetary Commission 



demand. Schmoller's estimate in 1893 that we invest 
every year about $250,000,000 in securities agrees with 
the statistics of new issues of securities floated during 
that period. Yet during the last five years (1 903-1 907) 
German securities, not including conversions, totaling 
about $625,000,000 annually, have been admitted to 
quotation on the German stock exchanges. This figure 
is taken from the official statistics which, among other 
things, include mortgage bonds authorized to be issued 
by the mortgage banks, and also mining stocks, etc. 
According to the statistics of the Frankfurter Zeitung 
(leaving out mortgage bonds and mining stocks, but 
including foreign securities) the new issues for the seven 
years 1 901-1907 reached an average of nearly $524,000,000 
annually, and for the years 1905- 1906 alone nearly 
$714,000,000. In addition to this brisk demand for 
capital and money, for investment as well as for circula- 
tion, Germany has had to cope with the greater demands 
of agriculture due to an increase in the price of land and 
its products, and above all with the greater demands of 
manufactures due to a rapid enlargement of plants and 
of output. It is only necessary to point to the following 
statistics of German consumption: 





Average yearly consumption in kilograms for — 




1886-1890. 


1907= 




Amount. 


Per capita, 


Amount. 


Per capita. 


Coal 


58,735,ooo 

4, 278, 000 

201, 046 


1, 225.00 

89. 20 

4. 19 


136,934,000 

13,046, 000 

385, 280 






213.80 
a 6. 28 


Cotton 







a For the year 1906 
14 



Renewal of Reichsb ank Charter 

Naturally the demand for credit money has also 
increased very considerably. Taking stamp fees as a basis 
for determining the amount of commercial paper put in 
circulation (deducting 10 per cent on account of the sliding 
scale fixed for such fees) we arrive at the grand total of 
$3,144,300,000 in 1889, which has since steadily increased 
from year to year until it reached $7,325,000,000 in 1907. 
This is an increase of $4,180,700,000, or about 133 per cent. 
If we add that of all the bills created in Germany less than 
40 per cent passed through the Reichsbank — that of the 
average of the outstanding bill circulation the average 
holdings of the Reichsbank amount to only about one- 
seventh (in the first decade of its existence only 11 to 12 
per cent, reaching in 1889 a maximum of 15.3 per cent and 
in 1907 about 13.8 per cent) — then we have furnished 
sufficient proof that the monetary stringency and the 
high interest rates of 1907 were, speaking broadly, caused 
by phenomena that had nothing to do with any flaws in 
the organization of the Reichsbank or mistakes of its 
management. 

II. GOVERNMENT OWNERSHIP OF REICHSBANK — PRIVATE 
BANKS OF ISSUE — NEW REICHSBANK SHARES — 
INCREASE OF SURPLUS — DISTRIBUTION OF PROFITS — 
TAX-FREE BANK NOTES AND INVESTMENT OF AVAIL- 
ABLE FUNDS. 

Although the members of the inquiry commission and 
the general public are satisfied by this time that the 
existing organization of the Reichsbank cannot be held 
responsible for a monetary stringency of such severity as 



15 



National Monetary Commission 

we have recently passed through, and that no change of 
the organization could possibly prevent a recurrence of 
such an event, the affairs of the Reichsbank have been 
the main feature of the commission's work. It is that 
part of the deliberations which has been brought to a 
conclusion, whilst the discussions regarding the protec- 
tion of depositors were broken off and are to be continued 
next year. The commission was guided in its work by 
the list of questions which had been submitted to it by 
the Government, and we will treat the different subjects 
in the same order as they appeared on that list. The 
preliminary question as to whether it would not be better 
to place the Reichsbank under government ownership 
was not touched upon, but the Government opened the 
inquiry by declaring that the constitution of the Reichs- 
bank should not be changed in any respect, and the way 
in which the questions were put clearly showed that it 
was the intention of the Bundesrat to renew the charter 
of the Reichsbank, and by no means to make use of its 
lawful right to abolish the institution. This policy is 
quite in keeping with the position which the authorities 
have always taken. While the sessions of the commission 
appointed to consider the banking act of 1899 were in 
progress, the representative of the Bundesrat announced 
in definite terms that it was unanimous in the determina- 
tion "to oppose the nationalization of the Reichsbank 
for political, economic, and financial reasons." 

At the time when the Reichsbank was established we 
should have preferred to have had the capital supplied 
from imperial funds alone. Instead of that the Empire 

16 



Renewal of Reichsb ank Charter 

contented itself with the power to revoke the Reichbank's 
charter at intervals of ten years, and when in 1889 this 
prerogative first led to discussions, we pointed out that 
the question hinged upon whether the Imperial Govern- 
ment considered itself entitled, in return for treating the 
resources of the Reichsbank as private property in case 
of war, to an insurance premium the amount of which 
has been steadily reduced at every renewal of the charter. 
The demands of the Agrarians that the Reichsbank should 
be compelled "to assist the economically weak" were 
later on met, in a measure, by state aid for agricultural 
credit institutions. In spite of this, however, the agrarian 
wishes carried considerable weight at the deliberations 
preceding the first renewal of the Reichsbank charter in 
1889. We insisted at the time that the Reichsbank, in 
pursuance of its most important duty, the regulation and 
protection of the monetary system, had to consider above 
all the fluidity of its investments; and also that its policy 
already favored the demands of agriculture for financial 
help as distinguished from those of commerce and indus- 
try, and even from those of the banks and the bourse. 
And yet a member of the Reichstag, Doctor Arendt, has 
announced his intention of again proposing the nationali- 
zation of the Reichsbank. It seems likely, however, that 
his political followers will not support him in this, and he 
himself declared not long ago "that the business methods 
of the Reichsbank would not be changed in the least if 
the bank were continued for account of the Empire 
alone," which to him seemed purely a "financial ques- 
tion." The Reichsbank has demonstrated on many 

83703—10 2 17 



National Monetary Commission 

occasions — for instance, in the Reichstag and in its his- 
torical review for the period 1 876-1 900 — that the financial 
importance of its privilege of note issue is generally over- 
estimated and that the return which the Reichsbank 
makes for this right and the legal conditions governing 
the issue of its notes are either overlooked or considerably 
underrated. 

If government ownership of the Reichsbank meets 
with a more decisive defeat this time than in previous 
agitations — as is generally expected — it would be advisable 
to give this question a longer rest than ten years, as in all 
likelihood the same reasons which now influence the 
retaining of private capital would be equally potent ten 
years hence. In the interests of the Reichsbank and 
even, it may be, in the interests of the Empire, it would 
seem to be better not to provoke the same discussions 
again after a lapse of only ten years, the question having 
so often been fought out without gaining in import or 
interest. No suggestion seems to have been made as 
yet that the charter should be renewed at once for twenty 
or thirty years instead of ten years only. If such a 
new departure were advocated, it could not be passed 
without the strong support of the Bundesrat. 

The inquiry commission has apparently not discussed 
at all the renewal of the privileges of the four remaining 
private banks of issue. If the question had been up for 
discussion, a continuation of these institutions would 
undoubtedly have found zealous advocates not only in 
the governments of the respective countries where these 
banks are located, but also among the members of the 



Renewal of Reichsb ank Charter 

commission, whether conservative or otherwise. When 
the legal -tender provision for the notes of the Reichsbank 
was considered, it was often urged that the same privilege 
be extended to those private institutions. This recom- 
mendation was strongly opposed; the most that seems 
attainable is that these notes may be decreed legal tender 
in the country where they are issued. Strenuous objec- 
tions would be raised even to a law which should permit 
the acceptance of private notes by public offices outside 
the State in which the notes were issued. The notes of the 
four private banks do as a rule circulate only in their 
home countries, which is sufficient. However, when a 
traveler wants to pay his fare at a North German railway 
station by tendering a South German bank note, the 
refusal which he gets is always resented as a nuisance if 
not a serious flaw in our monetary system. Provision 
should be made to prevent such occurrences, and this 
could be done by a simple agreement without amending 
the banking act. It will be seen in the following table 
what an unimportant part the private notes play nowa- 
days. 

[In millions of dollars; $1 = 4.20 marks.] 





Num- 
ber of 
banks. 


Assets. 


Circulation. 


Year. 


Discounts. 


Loans. 


Invest- 
ment se- 
curities. 


Total. 


Noncov- 
ered. 


1876 _ 


18 
8 
4 


$67.01 
48.39 
28.73 


$10. 73 

5-83 

14. 21 


$4-35 
2. 91 
2. 61 


$56.45 
4i. 77 
33.8o 


$20.43 
19.05 
14.28 


1891 







The inquiry commission seems to share our conviction 
that a permanent regulation of discount rates can not be 



19 



National Monetary Commission 

achieved by increasing the capital of the Reichsbank. 
The bank was forced by the last amendment to the bank 
act to raise its capital from 120,000,000 to 180,000,000 
marks ($28,570,000 to $42,860,000). One-half of the in- 
crease took place during 1900, the other half during 1904. 
It has since become apparent that this increase served 
hardly any other purpose than merely to shift capital 
from the open market into the Bank, but it fulfilled the 
wish of the Reichsbank not to let its capitalization remain 
too far behind that proper to a great credit bank. It also 
gave the Reichsbank the opportunity to increase its 
loans on collateral. Permanent influence, however, upon 
discount rates can never be attained by simply shifting 
more private capital into the Reichsbank. The present 
capital seems to afford ample security for the Bank's 
operations, and it looks as if the commission would prefer 
to strengthen the surplus in case a larger working 
capital should really become necessary. The Treasury 
would thus suffer a loss in so far as new shares become 
at once entitled to dividends, thus reducing the excess 
profits, of which the Imperial Treasury receives three- 
fourths; but no considerable increase of profit is derived 
as a rule from new capital either added to the surplus or 
provided by shareholders, while on the other hand every 
addition made to the surplus means three times as much 
taken from the government's share of the profits as from 
that of the shareholders. The investment of capital in 
building plots which the Reichsbank has already made 
extensively and will without doubt make on a yet greater 
scale in the future, might serve as a motive for increasing 



Renewal of Reichsb ank Charter 

the surplus as the profit share of the shareholders. In 
1876 $3,160,000 were invested in that way; in 1896 
$7,900,000, and at the end of 1907 $13,040,000. The 
surplus, however, may, in point of fact, increase faster 
than the Bank's building investments. 

The bank act provides that after a praecipuum divi- 
dend to the shareholders has been set aside, 20 per cent 
of the remaining profits are to go to the surplus as long 
as the latter does not equal one-fourth of the capital. 
The premium received for the last issue of new shares 
brought the amount of the surplus up to $15,430,000, 
i. e., 36.007 per cent of the increased capital. A further 
increase of the surplus would present only one advantage 
to the shareholders, namely, that they would be entitled 
to half of the surplus if government ownership should 
be decided upon, and in this way would get back a 
part of the high price which they had to pay for their 
new shares, whereas they are entitled to one-fourth 
only of the excess profits. They will hardly find much 
consolation in this, as they know full well that condi- 
tions do not favor the setting up of government own- 
ership at present or for a long time to come. Moreover, 
if the Reichsbank should be put under government 
ownership it would take an additional $23,800,000 in 
the surplus to refund to the shareholders even the 4.7 per 
cent premium and expenses which they paid for the new 
shares. Meanwhile the proposed contribution to the 
surplus means to the shareholders a considerable reduc- 
tion of their dividends. If fully 20 per cent of all profits 
remaining after a praecipuum dividend of 3^ per cent 



2\ 



National Monetary C ommis s to 



n 



had to go to the surplus — as was the case in former years — 
the surplus would receive from profits like those of 1907 
not less than $2,190,000. This would have meant a loss 
to the Imperial Treasury of about $1,640,000 and to the 
shareholders of $547,600, which would have reduced the 
dividend from 9.89 per cent to 8.61 per cent, i. e., not less 
than 1.27 per cent. This would have been the dividend 
for a year of brilliant economic success. A charge of 20 
per cent to the surplus would mean a dividend of 7.1 per 
cent instead of 8 per cent, 6.3 per cent instead of 7 per 
cent, and so on. Yet no discussion seems to have occurred 
during the bank inquiry on the qestion of how the surplus, 
after having been reopened, should be alimented. In 
some quarters it was thought that the contributions to 
the surplus should cease when the latter reaches about 40 
per cent of the capital. This is not far above the present 
figure, but the idea is not in accordance with the prevailing 
intentions. 

A number of ways might receive consideration, such as, 
for instance, to provide that in a bad year nothing should 
be written off to surplus. This, however, would leave a 
discretionary power in the hands of the management 
which it might find rather irksome. The simplest way 
would be to fix a certain percentage, but if 20 per cent 
of all excess profit — as provided at present in the bank 
act — were to go to the surplus, it would mean, as stated 
before, a very considerable reduction of the receipts, both 
of the shareholders and of the Imperial Treasury. For 
the next ten years a charge of 10 per cent ought to be 
sufficient for all purposes. However, it seems to us well 



Renewal of Reichsb ank Charter 

worth carefully considering whether a better plan would 
not be to establish a sliding scale under which a transfer 
to surplus would be made only after the profits of the 
shareholders and the Imperial Treasury had reached a 
certain minimum, say a dividend of 6 per cent, and of 
any profits exceeding a dividend of, say 8 per cent, the 
surplus would get not 10, but 20, per cent. 

In any case the shareholders will have to reckon with 
influences tending to reduce their dividends, not only 
because of economic ups and downs, but also because of 
the efforts of the Reichsbank to restrict some of their 
overzealous officials in the extension of credits and the 
intention of the Reichsbank to make pecuniary sacrifices 
in order to attract gold and to establish its control of the 
foreign exchange market. It is not altogether impossible 
that a proposal may be made in the Reichstag to change 
the present manner of dividing the profits between the 
shareholders and the Imperial Treasury, but we do not 
anticipate any success for such a move. Doctor Arendt, 
member of the Reichstag, has again declared in the press 
that the dividend should be limited to 6 per cent. The 
same motion was turned down in the Reichstag in 1899, 
on the ground that the introduction of the measure would 
stamp the Reichsbank even more as a state institution. 
The Government declared at that time that the proposi- 
tion was unacceptable because it tended toward govern- 
ment ownership. Here and there the fear has been 
expressed that the fact that the Imperial Treasury receives 
the largest share of the profits of an imperial bank, which 
is controlled and managed by the Government, constitutes 



23 



National Monetary Commission 

a serious menace in times of war. The maximum of 6 per 
cent would give to the shareholders not above 4.869 per 
cent on the stipulated amount of capital actually paid up, 
and only 4.081 per cent on the purchase price of the last 
issue (144 per cent plus 3 per cent expenses), not to speak 
of the risk of a possible falling off of the earnings and the 
ever present fear that the bank may some day be dis- 
solved by order of the Government. Such a considerable 
curtailment of the earning chances would frighten away 
capitalists for a time at least, if not altogether; whereas it 
is of great importance to the Reichsbank as well as the 
Empire that the shares should be held continuously by 
strong and permanent investors. It will be seen in the 
following table how the changes in the bank act have 
affected the distribution of the profits of the Reichsbank 
up to the present. 

[In millions of dollars; $i =4.20 marks.] 





Net 
profits. 


Paid to the — 




Imperial 
Govern- 
ment. 


Stockholders. 


Surplus. 




Amount. 


Per cent. 




39- 4i 
46. 27 
51-37 


8. 28 
23- 47 
29. 42 


27. 11 
22. 56 

I9-3I 


6. 32 

7.90 
7-03 


4.03 






2. 65 





The shareholders in 1879 received 86.7 per cent of the 
net profits, which were then at the lowest mark, the Gov- 
ernment only 8.8 per cent; but in 1890 the shareholders 
received only 51 per cent and the Government 34.2 per 
cent. The amendment to the bank act which was passed 
in 1890 reduced the quota of the shareholders in 1891 to 



24 



Renewal of Reichsb ank Charter 

48.5 per cent and raised that of the Empire to 46.1 per 
cent. In 1907 the shareholders received 34 per cent only, 
whilst the Empire's share amounted to 66 per cent. The 
next table shows the extent to which the distribution of 
profits has been affected by increases of capital. 



[In 


millions of dollars; $1 = 


4.20 marks.] 






Capital. 


Share of profits paid 
to — 


Stockholders received 
on — 




Imperial 
Govern- 
ment. 


Stock- 
holders. 


Nominal 
capital. 


Actual 
invest- 
ment. 


1876-1890 


28.57 
35-72 
42.86 


3i. 74 
n-73 
17.69 


49- 67 

8. 91 

10.39 


Per cent. 
6-95 
6. 24 

8.09 


Per cent. 
6. 043 
5-238 
6.563 









The average dividends received during the period 1900- 
1905 by the shareholders of various central banks of issue 
are as follows: 



Per cent. 



Reichsbank 

Bank of the Netherlands.. 

Bank of England 

Bank of France 

National Bank of Belgium 
Austro-Hungarian Bank... 



6. 22 
9. 16 
9- 50 
12. 60 
15- 00 
4. 61 



The governments received the following share of profits 
for 1907: 



From the — 


Amount . 


Per cent 




$8, 210, 000 

1, 360, 000 

i, 410, 000 

500, 000 

2, 270, 000 


66.0 




54-8 
16. 9 








37-5 





-'5 



National Monetary Commission 

The question whether the existence of the "contingent," 
or limit to the tax-free note issue of the Reichsbank, 
affects the determination of its discount rate was in fact 
hardly a question with the inquiry commission. The 
statistics show that the Reichsbank kept its discount 
rates at a minimum of 3 per cent in 1895, 1896, 1897, 1898, 
also in 1902 and 1905, even during periods when its circu- 
lation exceeded the nontaxable limit. Even during the 
years of our greatest industrial expansion the Reichsbank 
disregarded altogether the tax which it had to pay and 
managed to keep the discount rates at their lowest — e. g., 
\Y 2 per cent in 1899 and 1906 — at a time when its circula- 
tion exceeded the tax-free limit. The system of limiting 
the issue of bank notes by imposing a tax has this advan- 
tage, that not only the management of the Reichsbank, 
but the business world and the public at large are enabled 
by this automatically sliding scale to gauge the fluctua- 
tions in the demand for money, and have grown accus- 
tomed to look to it as a signal of possible stringency. It 
is necessary to fix the legal maximum with a view to this 
useful purpose. At first the limit of the tax-free note-issue 
happened to be fixed at 250,000,000 marks ($59,520,000), 
and it had actually risen by 1894, through the lapse of the 
privileges of private banks of issue, to 293,400,000 marks 
($69,850,000). 

The last amendment to the bank act, which went into 
force in 1901, fixed the limit at 450,000,000 marks ($107,- 
140,000), and it has since been increased to 472,829,000 
marks ($112,570,000). It has happened a number of 
times that the total outstanding circulation was more than 



26 



Renew a I of Reichsb ank Charter 

covered by the cash resources, so that the limit set for non- 
taxable circulation became practically ineffective. In 
1888 this occurred 28 times; in 1892, 27 times; in 1894, 
22 times; in 1895, 20 times. Later on such cases grad- 
ually dwindled down to 4 in 1902 and 1 in 1905. Nowa- 
days the outstanding circulation frequently exceeds the 
legal maximum. During the boom years, 1898 and 1899, 
the legal maximum was exceeded sixteen and twenty times, 
respectively ; in 1 902 three times ; but seventeen times in 
1906, and even twenty-five times in 1907. Not only the 
years of great industrial activity, but also the intervening 
periods, are accompanied by such rapid expansion of busi- 
ness and demand for money which the Reichsbank has to 
cope with, that there can be no doubt that an actual need 
for currency and for uncovered notes exists in this country. 
The following table shows the investment of funds by the 
Reichsbank during periods of five years, and their propor- 
tional growth as compared with the figures for the first 
five years. The fluctuations in the loans are quite marked, 
a great increase having taken place during 1 891-1895 and 
a pronounced decrease during 1 901 -1905. Still greater 
were the fluctuations in those investment securities which 
depend upon the Empire's floating-debt requirements. 
The chief item, bills discounted, shows a continuous and 
uninterrupted increase, and the sum total of the Reichs- 
bank 's investments has increased correspondingly. Un- 
covered notes show a decrease only during the period from 
1886 to 1896, when business was quiet, but since then they 
have substantially increased. It is also significant that 



27 



National Monetary Commission 

the number of officials employed by the Reichsbank has 
increased from 1,904 in 1876 to 3,024 at the present time. 

[In millions of dollars; $1 = 4.20 marks.] 



1876-1880 
1881-1885 
1886-1890 
1891-1895 
1896-1900 
1901-1905 

1906 

1907 



Discounts. 



84.89 
87.37 
no. 29 

131.94 
172.49 
199.94 
235.58 

262. 99 



Per cent, i Amount. 



102. 
129. 
i55. 
203. 
235. 
245- 



12. 25 
12.34 
14.88 
21.65 
22.45 
17.52 
19.91 
23.37 



Per cent. 



100. o 
100. 8 
121. 5 
176.8 
183.4 
143- 1 
162. 6 
190. 8 





Securities. 


Total investments. 


Uncovered bank 
notes. 




Amount. 


Per cent. 


Amount. 


Per cent. 


Amount. 


Per cent. 


1876-1880 


i-55 

5-S8 

4-75 

1.89 

2.78 

19.23 

27.88 

23- 73 


100. 

360.8 

306.4 

122.3 

179-5 

1,242.3 

1,801.3 

1.530.6 


98.68 
105. 29 
129. 91 
155.48 
197. 72 
236.69 
283.37 
310.09 


100. 
106.9 
131-6 
157-5 
200.3 

239-2 

262. 

286.7 


24-35 
27.88 
17. 61 
11. 64 
54.43 
66.37 
104. 40 
126. 44 




1881-1885 . ... 




1886-1890 






47. 8 




223.7 

















While it thus appears that an increase of the ' ' contin- 
gent" is justified, the question remains how great this 
increase should be. A separate consideration of the 
special needs that arise at the close of the quarter 
is inadvisable in this connection; it would tend to 
confuse the issue, and would be of no practical use. 
The management of the Reichsbank and the gen- 
eral public have grown accustomed to these regular 



28 



Renewal of Reichsb ank Charter 

flurries and do not overestimate their importance. 
Aside from this, it is a delicate task to determine a 
new limit. After passing through a period of unprece- 
dented activity we are now in the midst of an era of stag- 
nation, and nobody can say whether the lowest level has 
been reached and what the normal level will be in future. 
It remains to be seen what will be the effect of the Reichs- 
bank's new policy of cutting down certain credits and of 
the increased use of currency-saving methods, although 
it must be admitted that progress in this direction is slow 
on account of a too timid fiscal policy which, to mention 
one instance only, stands very much in the way of the 
newly created postal checks. On the other hand the 
economic fluctuations during the last decades have never 
touched again the low records of former declines. We are 
rapidly and steadily progressing, and this causes a cor- 
responding strain on the Reichsbank. It is to be hoped 
that the limit of the tax-free note issue will not be raised 
too quickly, since it might thus be rendered useless as our 
financial barometer in normal times. Nobody can expect 
that the contingent will be raised above 600,000,000 marks 
($142,850,000) . The opinion seems to prevail among well- 
informed men that a limit of 500,000,000 marks ($119,- 
040,000) would be best. It is doubtful whether the share- 
holders of the Reichsbank will benefit from such a change 
in the contingent. The need for uncovered notes remains 
always uncertain, and if the last amendment of the bank 
act had fixed the legal maximum at 600,000,000 marks 
instead of 450,000,000 marks it would have meant to the 



rt 



National Monetary Commission 

shareholders an increase of their share of the profits of only 
about 0.167 P er cexrt on the average capital or about 0.152 
per cent on the present capital. This is only an insig- 
nificant fraction compared to the loss which the share- 
holders will sustain by reason of the reopening of the 
surplus reserve. 

III. GOLD EXPORTS — GOLD IMPORTS — OUR STOCK OF GOLD — 
ADVANCES ON GOLD IN TRANSIT FREE OF INTEREST — 
FOREIGN EXCHANGE POLICY — INVESTMENTS IN FOR- 
EIGN EXCHANGE — CREDIT BALANCES ABROAD. 

We have already stated that the inquiry commission 
showed a remarkable consensus of opinion on a number 
of questions. This has been particularly the case on the 
questions dealing with the desire to strengthen the gold 
reserves of the Reichsbank by means of (1) the discount 
and foreign-exchange policy, (2) interest-free advances on 
gold in transit, and (3) gold premiums. On the last 
point our opinion is generally shared that such a premium 
policy is out of the question for Germany. The advocates 
of the measure have taken the idea from the example set 
by the Bank of France; but in France demands for specie 
can be satisfied with silver currency. In Germany this 
can not and must not be done. Nobody who can appre- 
ciate the advantages of a uniform monetary standard will 
advocate the imitation of the example set by France, 
which for years saw a depreciation of its standard with a 
premium on gold in 1898 of almost 0.4 per cent (0.395), 
and for a time even 0.65 per cent. Since 1904 the Bank 



30 



Renewal of Reichsbank Charter 

of France, too, has abandoned gold premiums. We infer 
that the commission also agreed with us that the outflow 
of gold to foreign countries should not be prevented when- 
ever and as long as the metal is required as a medium of 
exchange. Our foremost object must be the maintenance 
of the exchange parities in order that our credit in the 
international market and the reputation of the German 
gold standard may not suffer, with the purpose in view 
of finally placing the latter beyond all doubt and on the 
same firm basis on which the English sovereign stands 
to-day. We may safely say that all business men agree in 
considering it detrimental and regrettable that no gold was 
sent abroad when exchange for awhile in the fall of 1907 
ruled above the gold export point; and it may be well 
to emphasize the fact that the management of the 
Reichsbank reached the same conclusion. As we have 
explained before, it must have been either mistaken patri- 
otism or fear of antagonizing the Reichsbank which for so 
long a time kept our bankers from exporting gold, and 
which really created a depreciation, however short lived, 
of our monetary standard in the international money 
markets. Since that time it has come to light that the 
apprehensions of the bankers were quite unwarranted in 
fact, and all exporters of gold know better now. 

The next table deals with the movement of gold between 
Germany and foreign countries since 1900. The output of 
gold throughout the world had steadily increased up to 
1899, when it reached $306,430,000. The next year it was 
reduced through the Boer War to $254,520,000, but it has 



31 



National Monetary Commission 

increased each year since, amounting to $400,000,000 in 
1906, and to $404,760,000 (estimated) in 1907. Imports 
of gold during recent years have exceeded the exports in 
the principal countries. According to the trade bulle- 
tins of the last seven years (1 901 -1907) Germany's excess 
of gold imports over gold exports for that period was 
$316,120,000; France alone went ahead of Germany with 
its net import of $496,790,000, while England reported 
only $156,000,000, the United States $190,000,000, and 
Austria-Hungary not more than $54,050,000. The sta- 
tistics, to be sure, are not complete, as they do not account 
for gold which travelers carry with them across the 
frontier in their pockets and portmanteaux. But it 
cannot be doubted that the inflow of gold into Germany 
during the years 1904 and 1906, for instance, was much 
larger than the outflow. In 1907, on the other hand, the 
exports and imports of the yellow metal nearly balanced 
each other ; during October and November alone between 
$40,000,000 and $50,000,000 in gold had to be sent out of 
the country to maintain the par of exchange. In this 
connection it is worth while to notice that Germany's 
own gold production — derived either from foreign ores or 
from domestic and foreign residues — rose from $400,000 
in 1884 to $2,785,000 in 1906. This domestic production, 
however, is more than offset by the extensive use of gold 
in industry, which seems to have increased considerably 
in recent years. The amount of gold thus absorbed has 
lately been estimated at not less than $25,000,000 annually, 
but the exact figures are not yet available. 



32 



Renewal of Reichsb ank Charter 



Imports of gold. 
[In millions of dollars; $1=4.20 marks.] 



1901 
1902 
1903 
1904 
1905 
1906 
1907 



Germany. 


France. 


England. 


Austria- 
Hungary. 


+ 50. 9 


+ 54-8 


+32.9 


+ 27. 1 


+ 9 


5 


+ 60. 5 


+30. 2 


+ 16.9 


+ 46 


7 


+ 35- 7 


+ 4-3 


+ 8.8 


+94 


7 


+ 102. 9 


+ 4- 


+ 11. 2 


+ 45 


3 


+ 125. 


+ 37-6 


- 0.95 


+ 68 


2 


+ 52. 1 


+ 16. 7 


- 1.7 


■f 


88 


+ 65.2 


+ 30. 2 


- 7-4 



United 
States. 



- 3- 1 
+ 8. 1 
+ 20.95 

- 36.4 
+ 3-3 
+ 108.8 
+ 88. 1 



The changes which the stocks of gold of the central 
banks of issue have undergone since the Reichsbank came 
into being will be shown in the next table by yearly aver- 
ages. The Reichsbank 's stock of gold touched its lowest 
mark in 1881, being then not more than $49,210,000. 
By 1888 it reached $144,830,000, and did not rise much 
above that figure until the end of 1907 — a fact which is 
quite remarkable considering the heavy gains which 
were made by the other banks of issue during the same 
period. 

Gold reserves of the central banks of issue. 
[In millions of dollars; $1=4.20 marks.] 





Imperial 
German 
Bank. 


Bank of 
France. 


Bank of 
England . 


Austro- 

Hungarian 

Bank 


Imperial 
Bank of 
Russia 


Bank of 
the Neth- 
erlands. 


1876 


68.3 
144. 8 
143-3 
135-9 
177-5 
160. 7 
150.9 


297-9 
209. 7 
381.5 
406. 9 
55i- 1 
555-4 
521. 1 


138.8 
100. 1 
214. 6 
161. 1 
169. 6 
161. 2 
165.7 


33-4 
29. 
112 3 
183.3 
227.8 
225.6 
221. 9 


i57.o 
169. 6 
425.3 
399-4 
459-5 
405.7 
481.0 


29. 6 
25.7 
13.2 
23-4 
30.9 
27.8 
28.8 


1888 


1896 








1907 



83703—10- 



33 



National Monetary, Commission 

In view of this great disparity, the Frankfurter Zeitung 
has for many years urged that the Reichsbank should 
make strong efforts to attract gold to this country by 
adopting a more effective and businesslike policy. This 
advice has not been entirely disregarded. So far back as 
1879, when Germany stopped selling silver, the Reichs- 
bank began to make advances against gold in transit, 
free of interest. At first these loans were granted for 
five or eight days, subsequently for longer periods — accord- 
ing to the provenance of the gold — and lately even for 
periods of more than six weeks. The Reichsbank admits 
the need for precaution lest advances should be made 
on gold which would find its way there anyhow, or which 
might merely pass through Germany in transit to another 
country. During the present year the Reichsbank has 
again resorted to this policy with the gratifying result 
that during the first nine months $56,170,000 of gold 
have been secured (in 1907, $9,400,000; in 1906, $54,000,- 
000) ; and that the large increase in bullion and specie, 
which amounted to $259,050,000 on November 30 against 
only $161,660,000 a year ago, consists largely of gold. 

Not only has the Reichsbank gradually brought its 
policy with regard to gold imports in line with our sugges- 
tion; it has also come over to our view in the matter of 
foreign bills. The bank act does not prevent the Reichs- 
bank from "discounting, buying, and selling" foreign 
bills. On the contrary, foreign bills may be used like 
domestic bills — in addition to its cash holdings — to cover 
the bank's outstanding notes. In view of this, there is 
a more and more general opinion that, as we have said, 



34 



Renewal of Reichsb ank Charter 

the Reichsbank might influence the national balance of 
payments through its policy as to foreign bills. The 
influence would of course not be permanent, but on 
occasion it would be very useful. 

The rate of exchange does not very often go beyond 
the gold-export point, and even in 1907 sterling exchange 
ruled above that point only for twenty days. But that 
is quite bad enough, and a quotation for sterling as high 
as 20.60 — as it was then — does not speak well for the 
esteem which our monetary system enjoys abroad. 
Fluctuations in the balance of payments and in the price 
of bills will always occur; nor will it be possible to avoid 
even sharp advances in the rate of exchange, such as are 
brought about either periodically, as by the demand for 
exchange to pay for grain, cotton, etc., or accidentally, 
by a change in the movements of commodities, subscrip- 
tions to foreign issues, withdrawal of foreign credit bal- 
ances, etc. With a good supply of foreign bills at its 
command, the Reichsbank could prevent a sudden and 
forced rise of the exchange rates and meet the needs of 
international payments in time to prevent in many 
cases an actual exodus of gold. It is hardly necessary 
to state that the Reichsbank has long recognized that 
possibility. As late as 1898 its foreign bills amounted 
to but a few millions. The commission for the purchase 
of long-time foreign bills was then reduced from o. 1 per 
cent to 0.05 per cent, and by the next year the holdings 
had already increased. A summary for the last few 
years will be found on the following page. 



35 



National Monetary Commission 



[In millions of dollars; $1=4.20 marks.] 



Year. 


Purchases 
of foreign 
exchange. 


Per cent 

English 

bills. 


Average holdings. 


Amount. 


Per cent. 


1895 


12.86 
50.41 
54-53 
69.49 
63.84 


79-3 
95-i 
90. 2 
81.7 
81.8 


0. 61 

6.37 

7.88 

10. 29 

10. 59 


o.5 
3-3 

3-7 
4-4 
4.0 












Year. 


Maximum holdings. 


Minimum 


holdings. 


Profits. 


Date. 


Amount. 


Date. 


Amount. 


Per cent. 


1895 


Aug. 15 
Dec. 31 
Dec. 30 
Nov. 23 
Jan. 15 


0. 76 
17. 70 
12.45 
14-93 
14.98 


Feb. 28 
Feb. 23 
Aug. 23 
Sept. is 
Dec. 31 


0.51 
0. 78 
4.84 
4. 12 
5.6i 


5-05 
4- 24 
3.8i 
5-24 
6. 14 













The growth of the Reichsbank's foreign bill portfolio 
has been considerable, especially in view of the fact that 
the currency of such bills, which in 1895 did not exceed 
seventeen days, was gradually increased until in 1907 they 
ran sixty days. However, the Reichsbank still carries a 
much smaller quantity of foreign bills than the other 
central banks of issue. Of all bills bought by the Reichs- 
bank in 1907, 4 per cent were foreign bills, while the 
Austro-Hungarian Bank's proportion of foreign bills 
amounted to 8.3 per cent, that of the Bank of the Nether- 
lands to 12 per cent, that of the National Bank of Belgium 
(which treats them like its metal reserve as cover for 
outstanding circulation) to 23.9 per cent. The restraint 
of the Reichsbank cannot be ascribed to any reluctance 
on its part to make material sacrifices. The explanation 
is to be sought rather in the fact that for years the man- 

36 



Renewal of Reichs b ank Charter 

agement held the opinion regarding gold imports and 
foreign exchange that it would be better not to interfere 
with the international movement of money, because 
attempts at artificial improvement were apt to be suc- 
ceeded by vehement counter movements. Under the 
present management the Reichsbank has come to share 
our conviction that, when the balance of payments is 
favorable, it is wiser not to look on idly until the natural 
movements of foreign-exchange rates force an influx of 
gold and to run the risk, by such inactivity, that the 
surplus of Germany's commercial credit balances abroad 
be invested in foreign loans or used for other purposes. 

While gold imported into Germany upon the first 
favorable opportunity might be taken away again, it 
is nevertheless possible with constantly changing con- 
ditions that it might remain in this country longer than 
seemed at first likely. The inquiry commission did not 
discuss plans for adapting the foreign-exchange policy 
to this purpose, as the Reichsbank of its own accord had 
already begun to put to practical use the lessons learned 
in Vienna and Brussels. The National Bank of Belgium, 
as we have already pointed out, holds large amounts of 
foreign bills for its own account, besides those which it 
holds for the Treasury and savings banks, so that it has 
an enormous amount of such exchange at its disposal. 
The Austro-Hungarian Bank reports a considerably 
smaller quantity of such bills, and yet it is due to the 
efforts of that bank that the foreign-exchange rates have 
since 1901 never risen in Vienna more than 0.2 per cent 
above parity, while in Berlin in 1907 the sterling rate at 



37 



National Monetary Commission 

20.60 was 0.83 per cent above the mint parity and 0.5 
per cent above the exchange parity. This enabled the 
Vienna institution to maintain a steadier discount policy. 
For further information we refer to the article of our 
Vienna correspondent in the second morning edition of 
May 17, 1908, which contains a number of valuable data 
on this subject. Our correspondent outlines the remark- 
able methods by which the Austro-Hungarian Bank has 
gradually gained in its country the supremacy in the 
foreign exchange and bullion markets and perfected its 
arbitrage system in foreign exchange through corre- 
spondents all over the world. The article also describes 
how that Bank looks after its business and makes ready 
beforehand to meet expected heavy demands of money 
on the quarter or settlement days. The Reichsbank 
evidently intends to follow this example, if for no other 
purpose than to gain practical experience. It remains 
to be seen whether the Reichsbank will open check accounts 
in foreign centers, such as the Vienna institution main- 
tains, and whether a proposition which came from Vienna 
about ten years ago, that the two banks should keep a 
permanent gold balance with each other, will be taken 
up again. 

The Reichsbank has apparently not decided yet on the 
amount of foreign bills which it will take at any one time, 
but seems to be anxious to make very careful obser- 
vations before coming to a decision on that question. 
In its quarter - century report, the Reichsbank gave 
expression to the idea that its purchases of foreign bills 
might encroach upon the domestic demand for money. 



38 



Renewal of Reichsb ank Charter 

This contention no longer holds good, since the Reichsbank 
will from now on buy bills based on legitimate commercial 
transactions only and avoid all finance bills, and, in buy- 
ing foreign bills, simply takes the place of other banking 
firms which formerly used to employ their funds in that 
way. Another objection — that the Reichsbank offers its 
funds to foreign countries at their low rates of interest — 
seems unjustified as long as the Reichsbank does not 
make purchases abroad, and this, according to banking 
circles, the Reichsbank has never done. The Reichsbank 
has managed to increase its foreign portfolio by continu- 
ously appearing in the Berlin market as a buyer. The 
Reichsbank has thus acquired large amounts of foreign 
gold, not only through its investments in foreign bills, but 
also through its credit balances abroad, which it has kept 
with its correspondents out of the proceeds of matured 
foreign bills. In its weekly statement the Reichsbank 
does not separate the foreign bills from the foreign credit 
balances and it wants to continue keeping the respective 
figures secret, pointing to the example of the Austro- 
Hungarian Bank, which does not disclose the total amount 
of foreign gold at its disposal in excess of the $12,000,000 
which serves as cover for its outstanding note circulation. 
The Austro-Hungarian Bank's powerful control of the 
foreign-exchange rates and market is attributed solely to 
its practice of leaving the market in perpetual ignorance 
about the extent of its foreign-exchange investments. 
The annual report of the Reichsbank, however, will 
undoubtedly continue to give this information. At the 
end of 1907 the total of foreign bills was reported to be 



39 



National M on et ar y C ommis s io 



n 



only $6,140,000 and the total of credit balances with cor- 
respondents $2,400,000, the latter evidently being balances 
with foreign correspondents exclusively. It is certain that 
the Reichsbank's investments in foreign bills have during 
1908 considerably exceeded those of the previous year 
and that its credit balances abroad have also largely 
increased. This is evident from the weekly statements 
which show the "other assets" during the first months of 
the new year to have been practically the same as last 
year, but disclose a heavy increase since the end of April. 
On April 30 the "other assets" amounted to $11,430,000 
more than last year, and on June 30 to $29,050,000 more 
than last year. This includes short-term advances against 
gold in transit. The excess of "other assets" over last 
year's figures did not fall below $11,660,000 even on Sep- 
tember 30; on October 15 it amounted to $15,470,000, 
and on November 30 to $22,380,000. 

IV. GERMANY'S STOCK OF GOLD AND ITS DISTRIBUTION — 
SHALL THE NOTES OF THE REICHSBANK BE DECLARED 

LEGAL TENDER ? SMALL BILLS — SILVER CURRENCY — 

ADDITIONAL ISSUES OF SMALL BILLS. 

The question whether and in what way the cash hold- 
ings of the Reichsbank, particularly its stock of gold, may 
or should be augmented by attracting money from domes- 
tic trade, forces upon us for preliminary consideration this 
difficult question: What is the total gold supply of Ger- 
many? Unfortunately, the available estimates are not 
reliable. It is definitely known that up to the end of 
1907, after deducting currency withdrawn from circula- 

40 



Renewal of Reichsb ank Charter 

tion, $1,044,750,000 of gold coin had been minted. It is 
not known, however, how much of this gold coin has been 
shipped out of the country or whether it has been melted 
down abroad or been held in its original shape. Nor is it 
known how much has been absorbed by domestic indus- 
tries or other channels. The only statistics available at 
present are those issued by the Director of the Mint at 
Washington. The latter estimated the amount of gold 
in Germany at the end of 1906 to have been $1 ,030,200,000, 
of which $16.75 P er capita were in circulation. Both 
figures seem too high, considering that the gold coin 
minted at that time did not exceed the Mint Director's 
estimate, while on the other hand allowance must be made 
for coin exported or used for purposes other than circu- 
lation, as well as bar gold and foreign coin in our posses- 
sion which is not considered in the estimate. However, 
it is worth while to make a comparative study of the 
reports of the Director of the Mint, which for years have 
been compiled under a uniform system. The next table is 
reprinted from the Washington report. Germany's stock 
of gold, it will be seen, is relatively high, and gold coin 
circulates to a much greater extent in Germany than in 
any other country. The circulation of gold per capita is 
as follows: 

United States $6.71 

England 7. 00 

Russia 2.54 

France (which is so rich in gold) 10. 33 

Germany 14. 64 



4i 



National Monetary Commission 



[In millions of dollars; $1=4.20 marks.] 





Stock of gold. 


In banks. 


In circulation. 


Country. 


End of 1 ^crease 
st X during 
I9 ° 6 ' 1906. 


End of | ^ cr . ease 


End of 
1906. 


Increase 

during 

1906. 


Germany 

England 


1, 030. 2 

486.7 

926.4 

939-3 

1- 593-3 


+ 112. 9 

- 72.4 

— 106. 2 
+ 84.3 
+ 172. 6 


190. 7 
196.4 
520. 
609. 
1, 081. 4 


- 27. 4 
+ 8.3 

- 35-5 
+ 174-5 
+ 125. 7 


887. 1 
290. 2 
406. 2 
330.5 
5H-9 


+ 140. 2 
- 80. 7 




— 89. s 


United States 


+ 46.9 



We will show next how Germany's gold is distributed 
between the Reichsbank and the public. From 1876 to 
1907 the Reichsbank bought $821,700,000 in gold bars 
and foreign coin, of which only $98,500,000 were resold 
and $725,880,000 went to the mint for coinage. The Ger- 
man coined gold held by the Reichsbank has not increased 
in a ratio proportionate to these purchases, and this is true 
also even of its total stock of gold, including gold bars and 
foreign coin. After deducting the gold coin minted in 
Germany and held by the Reichsbank from the total 
amount of gold coined at the mint, there remained at the 
end of 1907 $919,820,000 of gold which was possibly in the 
possession of the banks and the public. This estimate 
includes gold which has since been exported, consumed, 
or lost. Yet, in spite of the liberal allowance which has 
been made for coin thus withdrawn from circulation, the 
quantity of gold which still circulates in our country will 
be found to be very large. 



42 



Renewal of Reic hsb ank Charter 



[In millions of dollars; $1=4.20 marks.] 





1 
Gold holdings of the Reichsbank. German gold coin. 


Year. 


Total. 


Bars, etc. 


German 
gold coin. 


In posses- 

«— • ha*?* 

bank. 


Remain- 
ing in 

circula- 
tion. 


1876-. 


68.27 

49- 20 

135- 89 

150. 91 


10. 12 
13-37 
31- 52 
25-99 


58. 14 

35.84 

104. 36 

124.92 


34i. 70 

419.53 

871.85 

1.044. 75 


58. 14 

35-84 

104- 36 

124.92 


283. 40 
383.69 
767- 53 
919. 83 


1881 -. 









NOTE. — The amounts are averages for the years given. 

It had been suggested in the list of questions submitted 
to the inquiry commission that in order to strengthen the 
Reichsbank's stock of gold by money drawn from domestic 
trade, the notes of the Reichsbank should be declared 
legal tender. 

Such a provision obviously by itself would scarcely 
suffice to draw gold out of circulation into the Reichsbank, 
as the notes of the Reichsbank have been taken in pay- 
ment by everybody without objection for more than three 
decades. We pointed out last spring that England, as 
well as France, has legal- tender notes, and yet in England 
the amount of notes in circulation is quite small, whereas 
in France it is greater than anywhere else, the figures 
per capita for 1907 being: 

England $3. 19 

France 2 3- 59 

Germany 5-69 

As it is, the notes of the Reichsbank are handled with 
an absolute confidence which could hardly be increased 
by declaring them legal tender. It might therefore be 
just as well to wait until an emergency arises and then to 



43 



National Monetary Commission 

issue the decree making the notes legal tender, and at the 
same time to enact by law that they be accepted at their 
face value in payment of debts, as France did in 1870. 
But the inquiry commission, which at first, we believe, 
was also of this opinion, has changed its mind, and now 
considers it advisable that the situation which already 
actually exists should receive legal sanction through the 
notes of the Reichsbank being made legal tender. The 
Reichsbank seems to have exerted itself to bring about 
that end, and the members of the inquiry commission, 
while thoroughly aware that the notes of the Reichsbank 
are freely taken all over the country, probably had in 
mind the burlesque "Schnabele" incident, when gold 
was hoarded for one whole day in Berlin, any serious 
disturbance being sufficient to remind the people of the 
fact that a tender of Reichsbank notes does not constitute 
a legal discharge from debt. It is therefore deemed 
preferable to proceed along these lines immediately, for, 
should the country be involved in a prolonged economic 
or political crisis, it would by that time have become 
accustomed to the legal-tender status of the notes of the 
Reichsbank and would in consequence be less inclined to 
hoard gold. 

To our objections that the enactment of a legal-tender 
law will cause a more frequent use of the gold clause in 
mortgages, etc., the advocates of the legal-tender measure 
point out that, even in the nineties, when our monetary 
system sustained for the last time the severe attacks of the 
bimetallists, the gold clause was hardly used and never 
enforced; only here and there, as in Frankfort, is it still 



44 



Renewal of Reichsb ank Charter 

to be found under ordinary conditions. On the other 
hand, we should not care to see the gold clause entirely 
abolished by law; if it were, a temporary depression of 
our monetary standard — should one really take place — 
would surely find the money lenders and money seekers 
inventing some expedient, or money lenders might favor 
foreign gold bonds to the disadvantage of our own bor- 
rowers. No proposition seems to be under way to amend 
the law so as to change the present provisions for the 
redemption of the Reichsb ank notes, as stated in article 18 
of the bank act, which compels the Reichsbank to redeem 
its notes " at its main office in Berlin upon presentation " — 
that is to say, to an unlimited extent — and at all its 
branches " as far as cash holdings and money requirements 
permit." We have pointed out before that the Reichs- 
bank is quite willing to do more than the law requires, 
and to exchange its notes for gold whenever this is neces- 
sary for the maintenance of the par of exchange; but it 
has not changed its views that, with its extended business 
throughout the country, it has no right in critical times 
to make it still more profitable for the exporters to ship 
gold by sending them whatever quantities of gold they 
desire to Kattowitz, or to Cologne, or to Hamburg. Nor 
will the bank in Berlin furnish to the exporter gold coin 
of full weight. On the contrary, as is also the case with 
the Bank of England, it prefers to pay out short- weight 
pieces, which, as experience shows, come back more 
quickly than others. On the other hand, it is to be ex- 
pected that the law which at present compels the Reichs- 
bank to redeem its notes "in current German money" 



45 



National M on et ar y Commission 

will be so amended as to compel it to redeem its notes in 
gold. 

This provision should be extended also to the 20-mark 
notes, whereas, according to article 9 of the present cur- 
rency laws, payments up to 20 marks may be made in 
silver. It is advisable to embody this obligation as to 
redemption in gold, which has existed in practice for a 
long time, in an express law, mainly for the instruction 
of foreign countries, where to our knowledge even an expert 
has misinterpreted the purpose of the legal-tender decree. 
In any case it will be recognized abroad when the next 
reports of our big banks appear, that the stringency of 
last year was due to the reaction from an unprecedented 
trade activity and to nothing else. The condition of the 
Reichsbank, and especially its stock of gold, will also 
prove this. We have already mentioned that the Reichs- 
bank has at last come over to our view and intends to 
specify the gold holdings in its weekly statements. It 
will be well for it to do this as soon as possible, at any rate 
not later than the beginning of the new year. 

It is to be regretted that the inquiry commission 
approved the issue of more notes of small denominations. 
This recommendation, however, did not receive the 
unanimous approval given to the legal-tender provision, 
but it was approved by a " majority of votes," in spite of 
the recent increase in the number of small notes. In 
1906 the Reichsbank received permission to issue small 
notes of 50 and 20 marks, and in 1908 the maximum 
limit of silver currency per capita, which had been raised 
in 1900 from 10 to 15 marks, was increased to 20 marks 

46 



Renewal of R etc hs b an k Charter 

per capita. The effects of these measures are evident 
from the next table, which shows how the denominations 
of the notes have changed in the course of years. In spite 
of the steadily increasing amount of the total circulation, 
the largest notes, those of 1,000 marks, have steadily de- 
creased in number in the last decade, whereas the number 
of ioo-mark notes has steadily increased, not only im- 
mediately after the abolition of the old 500-mark notes, 
but even afterwards during the ten years preceding 1905. 
Since the issue of the 50 and 20 mark notes the circulation 
of 1 ,000-mark notes fell off still more, but so did that of the 
ioo-mark notes, so that it is possible that the 50-mark 
notes drove out of circulation, in the main, only the ioo- 
mark notes. At the end of 1907, 50 and 20 mark notes to 
the amount of $69,150,000 were in circulation, and since 
then there has been a slight increase, until now the total 
is nearly $71,420,000, which is the maximum that may be 
issued in small denominations. Of the total circulation 
at the end of last February, 8 per cent consisted of 50- 
mark and 9.4 per cent of 20-mark notes. 





[In millions of dollars; $1 = 


4.20 marks.; 






Year ending December 


31 — 


Total 
circula- 
tion. 


1,000-mark notes. 


ioo-mark notes. 


Amount. 


Per cent. 


Amount. 


Per cent. 


1895- 


$314.31 
335- 70 
394- 45 
422.83 
449.04 


$119. 98 

90. 81 

101. 10 

94-45 

79.58 


35-6 
27. 1 
25- 6 
22.3 
17.7 


$201. 73 
244.35 
293- 45 
307.32 
300. 30 


64. 2 
72.8 
74-4 
72.7 
66.9 













47 



National Monetary Commission 





Year ending December 31 — 


50-mark notes. 


20-mark notes. 


Amount. 


Per cent. 


Amount. 


Per cent. 


1895. _ _ 






























1906 


$12.54 
33- 16 


2.9 

7- 4 


$8.53 
36. 


2. 1 

8.0 







It was to be expected that the 50 and 20 mark notes of 
the Reichsbank would temporarily drive the treasury 
notes out of circulation. The Reichsbank took in such 
large quantities of treasury notes that in 1906 it held more 
than $8,570,000 (against $5,230,000 to $6,190,000 in 
former years), and in 1907 more than $19,520,000, which 
left only $8,810,000 in circulation, as against about 
$22,610,000 in former years. But it is possible that the 
Reichsbank held these treasury notes back on pur- 
pose, because it was intended to split them up 
also into smaller denominations; moreover, during 
the present year $7,610,000 of treasury notes were 
again restored to circulation. At the end of 1907 
there were in circulation about $79,760,000 in treasury 
notes and new notes of the Reichsbank of smaller 
denominations whilst of smaller bills only the $28,570,000 
treasury notes were available, of which only about 
$22,610,000 were usually in circulation. Of those 
$28,570,000 treasury notes, $16,660,000 were 50-mark 
notes; $7,140,000, 20-mark; and $4,760,000, 5-mark notes; 
now it is proposed to put out $21,420,000 in 10-mark notes 
and $7,140,000 in 5-mark notes, besides about $33,330,000 



48 



Renewal of Reichsb ank Charter 

of 50-mark and $35,710,000 to $38,090,000 of 20-mark 
notes, all issued by the Reichsbank. The idea which 
originally guided our monetary reforms was that notes 
should be used for large payments, coin for all others, 
and small notes for remittances out of town. There were 
good reasons for this, because the purer our gold standard 
the finer an instrument it becomes to link us with the com- 
merce of the world. England permits no bank notes under 
£5; Austria, since the resumption of cash payments, 
none below 50 kronen (only up to that time were notes of 
20 kronen in circulation) ; France and Italy, none below 
50 francs. It would have been better to do without the 
20-mark notes of the Reichsbank altogether; and now 
that we have them, it is all the more necessary for us not 
to overburden our monetary system with small notes. 

We showed above, for gold coin, the amounts of coin 
minted, and held by the Reichsbank and by the public, 
respectively; and we shall now give the corresponding 
statistics for silver coin. The taler coins having only 
gradually disappeared from the Reichsbank and from cir- 
culation, we have also added the number of talers which 
at each of the stated times were in the possession of the 
Reichsbank. We have left out the nickel and copper 
coins, as almost all of them passed into circulation. Up 
to 1907 $24,380,000 were minted (39 cents per capita), of 
which the Reichsbank held only $476,000, while all the 
rest — $23,810,000 — was in circulation. 



83703—10 4 49 



National Monetary Commission 



[$1 = 4.20 marks. 



October 31, 1880 

October 31, 1900 

December 31, 1907.. 
January 31, 1908 



Silver in circulation. 



Popula- 
tion. 



Millions 
45. 2 
56.4 
61. 9 
61. 9 



Taler (3 | Per lv g& Per 
marks), capita. „";„T capita. 



Millions. 

$115- 14 

89.88 

7.83 

5-57 



$2.55 
1-59 
o. 12 
0.09 



Millions. 1 

$101. 69 $2. 24 
125.93 2.24 
215. 76 3.48 
217-52 3-52 



Total. 



Per 

capita. 



Millions. 

$216.83 
215-81 
223.59 
223. 09 



$4- 79 
3-83 

3-e-o 

3-6i 



October 31, 1880.. 
October 31, 1900 _ . 
December 31, 1907 
January 31, 1908-. 



In the Reichsbank and 
other government offices. 



In circulation. 



Total. 



Per capita 



Total. 



Millions. 

$86.48 

60. 40 

55-95 

61.52 



$1.91 
1.07 
0.86 
1. 00 



Millions. 
$130.35 

I55-4I 
167. 64 
161.57 



Per capita. 



$2.88 
2.76 



It will be seen that at the beginning of the year about 
$3.57 per capita had been issued in silver coins, of which 
about $2. 6 1 were in circulation. At the time the coinage 
laws were last amended the Government declared that the 
demand for silver coins (mainly 5 and 2 mark pieces) had 
increased to such a degree, especially for the payment of 
wages, that many branch offices of the Reichsbank were 
very far from being able to satisfy the demand for them. 
It was also argued that a careful policy required that the 
Bank should have at its disposition regularly at least 
$71,420,000 in silver to meet crises — in which case it 
would really have at its command, if we count the silver 
reserves of public treasury offices, about $78,570,000. If 
during the next four or five years another $60,470,000 were 



50 



Renewal of Reichs b ank Charter 

to be coined, Germany would then have $276,900,000 in 
silver coin. After deducting the above $78,570,000 there 
would remain only $198,330,000 for circulation, or, assum- 
ing the population by that time to have increased to 
64,600,000 people, not more than $3.09 per capita. This 
calculation is perhaps an underestimate; for, since an 
issue of $4.76 per capita is authorized, the population of 
64,600,000 would warrant the coinage of $91,190,000, and 
not $60,470,000 only. The Government, however, is 
pledged to issue new coins only in proportion to the real 
needs of trade, and these the Government expected to be- 
come somewhat smaller on account of the issue of the 
5-mark treasury notes up to the value of $21,420,000. 
We are nevertheless afraid that the Reichsbank may find 
the keeping of stock of $71,420,000 in silver (at the end of 
1907 it was not quite $49,280,000) not permanently practi- 
cable unless it succeeds in attracting and keeping a propor- 
tionate gold reserve. We think, too, that the need for 
small media of exchange will be amply satisfied as long as 
an amount of silver coin (apart from the reserves of the 
Reichsbank and public treasury offices) equal to $3.09 or 
even $3.57 per capita, and of small bills totaling 
$100,000,000, equal to about $1.66 per capita, remains in 
circulation. We are the more sure of this in view of the 
fact that the extension of the check system and the intro- 
duction of the postal check may be expected to lessen the 
demand for bills of small denomination. 

The suggestion of the inquiry commission that the 
Reichsbank be authorized to issue still more small bills 
deserves very careful consideration. When, in 1905, 



51 



National Monetary Commission 

the first issue of small bills by the Reichsbank was pro- 
posed, the Frankfurter Zeitung pleaded strongly that 
this authorization should be strictly limited to 50-mark 
notes, and that even for these a maximum be fixed. The 
sum of $71,420,000 was, in point of fact, set as a maximum 
not, indeed, by law, but by a binding declaration from 
Count Posadowsky. But besides these 50-mark notes, 
the 20-mark notes have since been authorized. If in 
future the 50-mark notes, which in moderate quantities 
are really needed, should no longer continue to be re- 
garded as small notes, that would strangely contrast 
with the spirit in which the limit of $71,420,000 was 
declared and accepted. In that case a maximum for the 
50-mark notes should be fixed and the limit for the 20- 
mark notes should be reduced considerably under the 
$71,420,000 fixed for the 20 and 50 mark notes together. 
We attach great importance to the fact that, although 
an increase in the amount of the 20 and 50 mark notes 
was suggested in the questions submitted to the inquiry 
commission, the official information given out to the 
press on the 19th of October mentioned only an additional 
issue of 50-mark notes as having been approved by the 
majority of the commission. The inquiry commission is 
supposed to have considered the issue of small notes 
preferable to the issue of silver coin because these notes 
must be covered in exactly the same manner as the 
larger ones; and yet, as things stand now, an increase of 
the silver circulation has been determined on which will 
exceed the requirements anticipated by the Government. 
A strong inflationist sentiment still exists among some 



52 



Renewal of Reichsb ank Charter 

powerful interests in this country, which have recently 
been humored by the introduction of the 3 -mark piece, 
which does not at all fit into our monetary system. It 
would be well to remember that "Gresham's law" is as 
good as ever, and that bad money drives good money out 
of a countrv. 

V. CHECK SYSTEM OF THE REICHSBANK — NATIONAL CLEAR- 
ING SYSTEM — MORTGAGE CLEARING SYSTEM — INTEREST 
ON DEPOSITS — PRIVATE AND PUBLIC DEPOSITS — THE 
DEPOSIT MINIMUM — DEPOSIT AGGREGATES. 

It is generally agreed that the best way to reduce the 
demand for currency is to encourage the practice of 
settling debts without the use of actual cash. The 
inquiry commission also regards as highly useful the 
efforts to make transfer, check, and clearing methods 
popular throughout the country. The schemes, how- 
ever, which have so far been advocated with that object 
in view would, if adopted, improve matters but little. 
It is to be hoped that the German public will from now 
on make more use of the check system, and the check 
law recently promulgated and the thorough propaganda 
which has been conducted on behalf of the system seem 
to justify this hope. The Reichsbank is in a position 
to support these efforts effectively, and agrees with the 
inquiry commission that its powers should be enlarged 
so as to permit it to purchase checks. If, however, the 
Bank intends, as is rumored, to deduct five days' interest 
on all checks purchased, the object intended is not likely 
to be attained. This action would be in keeping with 



53 



National Monetary Commission 

the half-hearted methods employed by the Reichsbank 
in the collection of checks — methods which have been 
the cause of many letters of complaint written to the 
Frankfurter Zeitung. To quote one instance, it has 
transpired that one branch of the Reichsbank, "as an 
exceptional favor," complied with the request to take 
for collection and remittance of proceeds a check drawn 
upon itself, but stated at the same time that the sender 
must as a rule get his checks cashed at the local branch 
of the Reichsbank in his own city, which usually means 
two days' loss of interest and a deduction for postage 
and commission. The Reichsbank has the most vital 
interest in popularizing the check system as a means of 
economizing currency. One would therefore think that, 
like the large banks, the Reichsbank might credit to the 
account of the payee free of charge checks drawn upon 
itself. In buying checks the Reichsbank should drop — 
wholly or partly, according to distance — its minimum 
charge of five days' interest, seeing that checks are not 
intended for circulation, but for collection. 

We are still far from realizing the idea of a national 
clearing-house. The idea is generally regarded with favor, 
but the banks can hardly be expected to lend their unan- 
imous cooperation, although the first suggestion came 
from the large Berlin banks, which were interested in the 
clearing-house as a means of simplifying their business 
with their branches. At first it was planned to make 
every check payable not only at the place upon which it 
is drawn, but also in Berlin. To this the independent 
provincial banks objected. The discussions were then 



54 



Renewal of Reichsbank Charter 

and there dropped, and it seems that the Berlin Bankers' 
Association has not paid any attention to the proposal 
for many months past. The establishment of a national 
clearing-house was repeatedly recommended by the 
inquiry commission, but with the precautionary suggestion 
that several other cities besides Berlin be designated as 
national clearing-house cities. The latter suggestion 
might meet with more general favor, as might also a plan to 
make these national clearing-houses an adjunct of the 
postal-savings banks which will shortly be established. 
Success in this field depends entirely upon time and tire- 
less effort. 

A little over a year ago the Reichsbank was authorized 
to accept and make payments in connection with mort- 
gages, but so far very little progress has been made in 
that new branch of its business. The opening of the 
proposed mortgage clearing-house has been deferred 
until April i, 1909. In order to attract a fairly large 
business to that institution, the cooperation not only of 
mortgage banks outside of Berlin, but also of other large 
dealers in mortgages should be solicited. Among the 
latter class, the insurance companies are conspicuous by 
their lack of interest. Our progressive insurance depart- 
ment would add to its laurels if it could successfully draw 
the attention of this class of the community to the great 
benefits which would be derived from their cooperation 
by the public as well as by themselves. State institutions 
as trustees of a considerable number of mortgages are also 
important to the development of this clearing system and 
yet seem to need a stirring up from above. 



55 



National Monetary Commission 

The proposal that the Reichsbank take interest-bearing 
deposits met with almost unanimous opposition. The 
bank act authorizes the Reichsbank to do so up to a total 
amount not exceeding its capital and surplus. This priv- 
ilege, however, was used only during the first years of the 
Bank's existence. If the Bank were to try to attract 
large quantities of money by paying interest thereon, it 
would have to change its present policy of letting business 
come to it, and would have to hunt for suitable business to 
enable it to pay such interest, especially at times when 
money is abundant — that is, when it flows into the Bank 
in unusually large quantities, but is also unusually hard to 
dispose of. This would force the Reichsbank to adopt 
methods and run risks similar to those of the big banks — 
a course which is to be deprecated in view of the fact that 
the Reichsbank is the guardian of the German monetary 
system. As early as 1878-79 the Reichsbank ceased to 
allow interest on deposits, because through the speedy de- 
velopment of its deposit and transfer system, it obtained 
a considerable quantity of noninterest bearing deposits. 
At that time these deposits reached an average of hardly 
$47,600,000; in 1907 their average for the year was nearly 
$142,900,000. There is surely no need for the Reichs- 
bank to accelerate this growth of its resources by paying 
interest on deposits. The statistics furnish interesting 
evidence as to the composition of the deposits. The 
Reichsbank has again refused to fulfill the urgent request 
made by us for years that it should separate the public 
from the private deposits in its weekly statements, as it 



56 



Renewal of Reichsb ank Charter 

does in its annual report. This we regret in the interest 
of the community, which should be enabled to watch the 
fluctuation in the private deposits, so that it may form a 
judgment as to the weekly statements and as to the posi- 
tion of the money market. The Reichsbank is scarcely 
justified in refusing our request; the Bank of England and 
the Bank of France set an example in this respect which 
our public institutions would do well to follow. Particu- 
larly in Prussia, the old dread survives that to bare the 
cash resources of the Government to the public view might 
obstruct the negotiation or spoil the issue price of a public 
loan. This is not as true now with our highly developed 
banking system as it was formerly. The big banks gen- 
erally know the requirements of the Empire and of Prussia, 
even though the public deposits in the Reichsbank are not 
separated from the private deposits ; and they are as a rule 
not surprised when the Government announces the issue 
of a new loan. On the other hand, it has long been known 
that the credit balances of public institutions increase 
during the summer and decrease in the fall and until the 
beginning of the new year ; the difference between the high 
and the low figure amounts to about 200,000,000 marks 
($47,600,000) or more; it reaches that figure sometimes 
within a single month. The public and private deposits 
do not move up or down together, but are rather apt to 
vary in opposite directions. The present system of com- 
bining the two items is therefore liable to obscure the real 
movements and to be misleading. 



57 



National Monetary Commission 



[In millions of dollars; $1=4.20 marks.] 



Years. 



1876-1880. 
1881-1885. 
1886-1890. 
1891-1895. 
1896— 1900. 
1901-1905. 

1906 

1907 



Total 
deposits 



46. 02 
48.35 
84.08 
115. 26 
117.52 
135-57 
137- 06 
137.92 



Private deposits. 



Amount. 



34.31 
39.03 
62.31 
73- 18 
76.41 
87.58 
94. 14 
95- 84 



Per cent. 



74-5 
80. 7 
74- 1 
63.5 
65.0 
64.6 
68.7 
69.5 



Public deposits. 



11. 71 

9.32 
21. 77 
42. 08 

41. 11 
47-99 
42.92 

42. 08 



Per cent. 



25.5 
i9-3 
25.9 
36.5 
35.o 
35-4 
3i-3 
30.5 



This table gives the impression that the deposits at the 
Reichsbank, after increasing rapidly, have, for some time 
past, attained a certain stability. This, however, applies 
chiefly to the aggregate amount. It will be seen that the 
public deposits have somewhat decreased since about 
1900, while the private deposits show a steady increase. 
When in the fall of 1906 the Reichsbank raised the amount 
of the minimum balance to be kept on check account, 
loud complaints were made which were not altogether 
unjustified. The statistics of the Reichsbank do not 
sufficiently show the effect of this measure, because they 
can be used only for a comparison between the 15th of 
September, 1906, and the 31st of March, 1908 — dates 
which do not correspond. Looking at the figures in that 
way, the account of the Reichsbank shows the minimum 
balances of private depositors to have increased from 
$19,410,000 to $27,000,000, i. e., from 28.3 to 43.7 per 
cent of their actual balances. Yet the total deposits had 
declined from $68,510,000 to $62,000,000. It therefore 
remains at least an open question whether the private 
deposits have actually been increased through the rais- 

58 



Renewal of Reichsb ank Charter 

ing of the deposit minimums. It is well known that this 
measure has caused many large concerns to do their own 
clearing; even now the big banks try to do this, particu- 
larly with the out-of-town collections, so as not to pro- 
voke the Reichsbank to further demands through an 
increase in the bulk of their business. The public and 
the Reichsbank, however, have such a vital interest in 
the further development of the currency-saving check 
system that the Reichsbank should be as accommodating 
as possible in the matter of fixing the amount of the 
minimum balance. Experience does not warrant an- 
other raising of it, as was suggested in the list of ques- 
tions submitted to the inquiry commission. It is our 
firm conviction that no considerable increase in the cash 
resources of the Reichsbank could be brought about in 
that way. We again refer the reader to the articles by 
our Vienna correspondent which appeared in our columns 
last May. According to him the Austro-Hungarian 
Bank does not require a minimum balance in excess of 
20,000 kronen ($4,250), even from the big banks; the 
Reichsbank demands as much as 1,000,000 marks 
($250,000), and more. Allowing even for the extended 
field of the Reichsbank operations, one must agree with 
our correspondent that the Vienna institution does much 
more than the Reichsbank in the way of giving its valuable 
services to its cilents " without charge or for an obviously 
insignificant remuneration." 

We admit, however, that the Reichsbank in its trans- 
fer system shows results which are of the greatest value 
to our economic life. The next table will show, alongside 



59 



National Monetary Commission 

of the total turnover of public institutions and private 
customers, the proportion of the turnover which was 
effected by means of the currency-saving transfer system. 
In 1876, 59.5 per cent of the turnover was effected in 
cash, in 1890, 27.9 per cent, falling to a little over 15 
per cent in 1906-7. To every mark in the transfer 
accounts the total turnover in 1907 reached 451 marks, 
i. e., about 65 per cent more than twelve years before; 
382 marks of this turnover was settled without cash pay- 
ment, an increase of about 70 per cent. As an interesting 
feature we add to the next table an analysis of the accounts 
concerning the occupations and individual credit balances 
of the depositors. Of all the private accounts existing on 
March 31 , 1908, 32.8 per cent were kept by commercial and 
transportation enterprises and insurance companies, 40 per 
cent by trade and industrial concerns, and only 16.7 per 
cent by banks and bankers. Of the sum total, however, 
of all private credit balances, only 13.8 per cent belonged 
to commercial and transportation enterprises and insurance 
companies; 27 per cent to trade and industrial concerns; 
and 51.6 per cent to banks and bankers. Each deposit 
made by commercial and transportation enterprises and 
insurance companies averaged $1,345; by the trade and 
industrial concerns, $2,150; by banking concerns, $4,172; 
by joint stock banks, $21,566. The deposits under 
$2,500 constituted 16.48 per cent; those from $2,500 up 
to $12,500, 19.83 per cent; from $12,500 up to $25,000, 
10.57 per cent; from $25,000 up to $250,000, 29.64 per 
cent; and still larger ones, 22.69 P er cent. The latter, 22 
in number, averaged about $654,500 

60 



Renewal of Reichs b ank Charter 



[In million dollars; $1 = 4.20 marks.] 





Total 
transac- 
tions. 


Effected by cash 
payments. 


Effected by book 
transfers. 


Credit 

bal- 
ances. 


On every dollar in 
transfer balances. 


Year. 


Amount. 


Per 
cent. 


Amount. 


Per 
cent. 


Total 
turn- 
over. 


Turn- 
over 
settled 
without 
cash pay- 
ment. 


1895 

1900 

1905 

1906 

1907 


$22,309 
38,960 
52, 890 
58,481 
62, 061 


4,053 
6,534 
8,183 
8,936 
9, 537 


18.2 

16.8 
15-5 
15-3 
15- 4 


18,256 
32, 426 
44, 707 
49, 545 
52,524 


81.8 
83.2 
84.5 
84.7 
84.6 


81.51 
121. 96 
139- 14 
136. 67 
I37.6I 


274 
319 
380 
428 
451 


224 
266 
321 
363 
382 



VI. ° DOMESTIC BILLS — GERMANY AND FRANCE — BANK RATE 
AND PRIVATE RATE — ILLEGITIMATE PAPER — LOANS ON 
COLLATERAL. 

The question has come up for discussion whether efforts 
should be made to reduce within smaller limits the de- 
mands for financial assistance which are being made upon 
the Reichsbank at present. In this connection we refer 
to our next table, regarding the nature of the concerns in 
the different parts of the country whose bills were handled 
by the Reichsbank during the year 1907. The northeast 
provinces include Brandenburg, East and West Prussia, 
Pomerania, Posen, Schleswig-Holstein, while the "other 
provinces " include Silesia, Saxony, the Thuringian States, 
Hanover, Oldenburg, Brunswick, Hesse-Nassau, and Rhine- 
land- Westphalia. It will be seen that of all bills discounted 
by the Reichsbank nearly 53 per cent were tendered by 
banks and bankers, nearly 27 per cent by industrial con- 
cerns, not quite 18 per cent by commercial houses, and a 

a Gold bars and coin converted at 1,392 marks ($331.42) per pound fine. 

61 



National Monetary Commission 

little more than i ]/ 2 per cent by interests connected with 
agriculture. This statement, however, may lead to false 
conclusions, unless certain facts are kept in mind. Bills 
of agricultural origin, which seldom are commercial but 
nearly always accommodation bills, are as a rule not 
tendered directly to the Reichsbank; and when the bills 
that reach the Reichsbank indirectly are included in the 
total, the number of agricultural bills will be found to have 
amounted in 1893-94 to 4.3 per cent and in 1897 to 5.1 per 
cent of all bills discounted. In the eastern provinces alone 
20.2 per cent of the bills discounted were of agricultural 
origin; at some of the branch offices nearly one-half of 
the discounts consisted of such bills — in Flensburg, for 
instance, and also in Koslin, Tilsit, and Posen. Prussia's 
share in the Reichsbank's bill portfolio was nearly 77 per 
cent, and amounts falling to Prussian banks, manufac- 
tures, and commerce formed approximately the same per- 
centage of the various totals in question. The details 
naturally vary somewhat; thus, Berlin alone contributed 
*]}4 per cent of all bills, but only 2 per cent of the bills 
drawn by industrial concerns, 5 per cent of bills by com- 
mercial houses, 1 1 per cent of bills by banks and bankers, 
while Rhenish Prussia contributed 12 per cent of the bills 
drawn by banks and bankers, 8 per cent of bills drawn by 
commercial houses, and fully 30 per cent of bills drawn by 
industrial concerns. 



62 



Renewal of Reichsb ank Charter 



[In millions of dollars; $1 = 4.20 marks.] 





Domes- 
tic bills. 


Percent- 
age of 
all do- 
mestic 

bills 
bought 
by the 
Reichs- 
bank. 


Amount of domestic bills bought by the Reichs- 
bank, drawn by — 




Banks and 
bankers. 


Industry. 


Com^.rce. 1 ^rt 




§ 

S 

< 


a 

V 

u 

U 

tu 

ft 




a 
< 



u 

ft 






a 
< 


Per cent. 
Amount. 


a 
u 

V 

ft 




193-9 
19. 

54-6 
120. 4 

58.5 


76.82 
7-52 

21.63 
47-67 

23-18 


99-7 

15-2 

28.4 
56.1 

33-6 


74.8 

11. 4 
21. 4 

42.4 

25. 2 


53- 2 
1. 4 

42. 1 
14-5 


78.6 

2. O 

14.4 
62. 2 

21. 4 


35-2 
2-3 

13- 4 
19.4 

9-6 


78.6 2.3 
5-2 0.05 

30.0 1.1 

43-3 1-2 

i 
21.4 0.3 


87.3 

i-5 

4i.3 
45-0 

12. 2 


Berlin 


Northeast prov- 


Other provinces. _ 

Other parts of 

Germany 


Total 


252.5 


100. 


133-3 


IOO. O 


67.8 


IOO. 


44- 7 


100.0 2.65100.0 



The comparison between the bill transactions of Ger- 
many and France will also be found of interest. The 
income derived from bill stamps justifies the conclusion 
that in this country, as well as in France, the volume of 
bills put into circulation has for years been on the increase. 
While only $3,333,330,000 of bills were created in Germany 
as recently as 1890, the same item ran up to $4,880,950,000 
in France. This is the more remarkable when one takes 
into consideration that it is less usual across the Vosges 
than in our country to allow commercial debts to stand 
on the books for any length of time. But by 1907 the 
circulation of bills had increased in Germany to nearly 
$7,321,420,000; in France only to about $6,904,760,000. 
Therefore the increase in France amounted to about 40 ^ 
per cent only, but in Germany to nearly 120 per cent. 
This shows how rapidly the demand for accommodation, 



63 



National Monetary C o mm is s to 



11 



hand in hand with the demand for capital, has increased 
in this country. Although the total amount of bills is 
nearly equal in both countries, yet, if we look at the dis- 
tribution per capita, we find the relatively large amount 
of $174.52 in France, while in Germany it is only $118.33, 
a figure which France had already reached about the 
year 1880 but hardly exceeded before 1895. Assuming 
the average duration of all bills in circulation to be ninety 
days, it may be said that the Reichsbank participated in 
this circulation to the extent of only 13.8 per cent in 1907, 
and the Bank of France to the extent of only 12.5 per 
cent. The average time to maturity of bills discounted 
by the Reichsbank, which gets large quantities of bills 
when they are nearly due, is in the neighborhood of thirty- 
two days, while bills taken by the Bank of France have 
an average of only twenty-six days to run. Up to about 
1894 the average time to maturity of bills held by the 
Reichsbank had increased from thirty-five to about 
forty-one days, and it has since then gradually fallen from 
forty-one to thirty-two days. Of all bills put into circu- 
lation during the year 1907, 38.6 per cent were discounted 
by the Reichsbank, and 44.3 per cent by the Bank of 
France. 

The Reichsbank is naturally desirous to ascertain as 
far as possible how many bills circulate in the country 
and what the standing of the individual borrowers may 
be. That the Reichsbank does not obtain such a large 
proportion of all the bills as the Bank of France is partly 
explained by the fact that the difference between the 
bank rate and the open discount rate in Paris rarely 



64 



Renewal of Reichsb ank Charier 

exceeds 0.5 per cent, whilst in Berlin it generally is as 
high as about 1 per cent or even more; in London the 
difference is subject to wide fluctuations; it amounted to 
fully 1 per cent ten to fifteen years ago, whereas in 1906 
it shrank to 0.22 per cent. In this country, too, the dif- 
ference has been smaller at times. In 1896 to 1900, for 
instance, it was only 0.71 per cent; it rose in 1906 to 
1.1 1 per cent, fell in 1907 to 0.91 per cent, and rose again 
in the first six months of 1908 to 1.26 per cent. Bach 
temporary shrinkage of the difference coincided with a 
period of monetary stringency, being caused by a rise in 
the market discount rate. On the other hand, as money 
usually fetches a higher price here than in London and 
Paris, the international currents of money are apt to 
depress our open discount rates, money being sent to 
Germany and German bills going abroad whenever the 
difference between the official and the private rate is 
sufficiently attractive. There are some differences in the 
methods of quoting the discount rates. In Berlin the 
discount rate for prime bankers' bills is quoted as the 
regular market price, while in London one has to pay com- 
missions, and the bank rate is not always effective there. 
There is little prospect of a change until a readjustment of 
the relation between capital and credit is accomplished in 
Germany. The Reichsbank can, of itself, do little to gain 
greater control of the open discount market except 
through its discount policy and perhaps by rediscounting 
treasury bills in times of monetary stress, which might 
cause the market rate temporarily to advance within the 
neighborhood of the official bank rate. 

83703—10 5 65 



National Monetary Commission 

At any rate, it would be bad policy to attempt to in- 
crease the cash holdings of the Reichsbank by reducing 
its discount operations. But apart from that, it will be 
remembered that in a series of articles published last 
spring and entitled "The Problems of the Bank Inquiry," 
the Frankfurter Zeitung expressed the view that the 
Reichsbank should not resort to artificial methods of 
attracting discounts. Some of its branches have at times 
been guilty of doing this, and have even tried to obtain 
bills while a rise in the bank rate was imminent, thus 
rendering the Bank's own discount policy ineffective. It 
has since become known that the Reichsbank had to put 
a damper on the zeal of its officials about two years ago. 
So-called finance bills, drawn by bankers on bankers, and 
open to the suspicion of being drawn simply for the 
purpose of getting hold of money, have long ago and 
repeatedly been put on the index. Yet it was discovered 
that the branches of the Reichsbank frequently dis- 
counted bills which obviously were created for the sole 
purpose of furnishing their makers with permanent 
working capital. It even appears that on many occasions 
one or more renewals upon maturity were promised and 
discount credits granted against deposit of securities. Of 
course, it can not be denied that such renewals may 
represent perfectly straightforward transactions, but 
practical experience evidently has induced the Reichs- 
bank to demand that as a general rule all transactions 
should terminate upon maturity of bills. Agricultural 
interests alone are to be allowed one renewal in case of 
need, as heretofore. Discounts against deposits of securi- 



66 



Renewal of Reichsb ank Charter 

ties are henceforth to be granted in exceptional cases 
only ; all other paper taken for discount by the bank and 
its branches must be genuine commercial paper, and all 
factitious bills are to be rejected. These are the instruc- 
tions which were again sent to all the branches last spring, 
and provisions have also been made to enable the head office 
to keep posted on all discount transactions entered into 
throughout the country. In this way the Reichsbank is 
sure to minimize its risks and to keep its funds in a more 
liquid state. Undesirable accommodation is being with- 
drawn with careful moderation, so that the cleaning-out 
process should not bring about disturbances. The banks 
and bankers have taken over some of the accounts which 
the Reichsbank no longer cared to finance. 

It remains to be seen how long the new regulations of the 
Reichsbank can dampen the overzeal of its branch man- 
agers. It can not be said that the laxer methods were 
principally confined to officials who were desirous to 
increase their share of the profits. On the contrary, the 
illegitimate and undesirable bills were generally found in 
the possession of the small branches. The latter consti- 
tute about four-fifths of all branches, and their managers 
are not entitled to a share of the profits. Some of the 
banks' managers did not seem to be aware at all of the 
fact that the Reichsbank when investing its money had 
to be no less careful to insure quick convertibility of its 
funds than it must be to obtain proper security; nor 
were they alone to blame, as it is more than likely that 
the mistake had been made of judging the work of the 
individual manager too much by the profits which his 



67 



National Monetary Commission 

branch showed at the end of the year. It will be the duty 
of the head office to convince its subordinates that in the 
future the quality of their work will be judged not solely 
by the scale of profits which they can show. 

The Reichsbank can not do a collateral-loan business 
to an unlimited extent. Such loans are not to be counted 
as cover against outstanding circulation; and since they 
are made to one individual debtor, they do not offer the 
same chance of quick convertibility as do the bills, which 
bear the names of more than one person. It is true that 
these loans are secured by a pledge which can be liqui- 
dated by a forced sale, which, in case the security was in 
the form of stocks and bonds, would tend to depress 
prices. The bank act has, therefore, provided a maxi- 
mum limit for the loans, which is fixed from time to time 
by the executive committee of the Reichsbank. If the 
capital of the Reichsbank should be increased, or if the 
surplus should be opened, this limit will most likely be 
raised. It is proposed that the Reichsbank should be 
authorized to make loans against hypothecations entered 
on the books of the Empire or its constituent States. 

The maximum limit provided for loans on collateral 
has up to the present never been made public, and the 
central management of the Bank seems to take it as an 
approximate guide only; but it is known that the limit 
has often been exceeded — in 1895, for instance, and after- 
wards, and in 1907 to a considerable extent. The former 
limit of $42,850,000 is supposed to be still in force, 
although it was actually exceeded after the increase of 
the Bank's capital to such an extent that on one occasion, 



68 



Renewal of Reichsbank Charter 



on December 31, 1907, $86,660,000 were outstanding in 
loans on collateral. It is likely that the proposed new 
limit will be fixed with reference to this figure. The 
actual amount of loans on collateral gradually increased 
during the first decades, rising from a yearly average of 
$10,710,000 or $11,900,000 to $25,710,000 in 1897. At 
that time the Tandschaften requested that the Reichsbank 
should accord to mortgage bonds the same preferential 
treatment extended to imperial and state securities. 
Instead of complying with this request, the Reichsbank 
gave up discriminating in favor of any securities, and since 
then its average loans fell to $17,140,000 in 1905, and 
amounted to only about $23,330,000 in 1907. Most of 
the loans were made against investment securities (95 per 
cent to 98 y 2 per cent). The percentage of loans against 
commodities was still as high as 14.9 in 1876, gradually 
decreasing to 1.5 per cent in 1907. The percentage of 
loans against precious metals was insignificant — only about 
0.4 to 0.002 per cent. The distribution of the loans 
according to the occupations of the borrowers and accord- 
ing to the different parts of the country is shown in the 
next table, which gives the figures as of December 31 , 1907. 

[In millions of dollars.] 





Total 

amount of 

loans. 


Banking. 


Industry. 1 Commerce.' f^ 

i 




36.66 

15.83 

18.06 

9.41 

6.76 


34.5o 

9. 02 

13-08 

6. 24 

5.85 


o. 30 

1-95 
0.81 
1.49 
0. 18 


1. 06 

1. 26 
1.99 
o.34 
o.35 




Eastern and northeastern 
Germany, excluding Ber- 
lin 








Rhineland-Westphalia 


0.03 
0. 005 






86. 72 


68.69 


4- 73 


5- 00 0. 475 



69 



National Monetary Commission 

The fact that, out of loans to the value of $86,720,000, 
$36,660,000 were made in Berlin alone, of which banking 
concerns secured $34,500,000, is explained when one re- 
members that at that time the Preussische Central 
Genossenschaftskasse alone owed $16,100,000 to the 
Reichsbank in the shape of loans on collateral. On the 
23d of January and the 23d of March, 1908, that institu- 
tion owed the Reichsbank only $119, but on March 31, 
1908, again $9,280,000. In view of the fact that the 
Preussenkasse makes severe demands on the money 
market at the close of the quarter, our belief is confirmed 
that the Preussenkasse is largely to blame for the strin- 
gency at those times which is the subject of so much com- 
plaint. The following table shows the nature of the 
pledges in the different parts of the country where the loans 
have been made, giving the figures as of August 15, 1907: 

[In millions of dollars; $1=4.20 marks.] 



Description of 
collateral. 



, of collat- 
I eral 



Amount 
of loans. 



State bonds 69.45 

Provincial bonds 43 . 67 

Municipal bonds 5.75 

Mortgage deben- 
tures 12.66 

Mortgage bank 

bonds 10.22 

Rentes, etc 2.59 

Second-class securi- 
ties (50 per cent). 1. 75 

Merchandise 1.67 

Precious metals ; 0.002 

Bills 1 11. 14 



64 

002 

79 



Total amount of loans granted in- 



Berlin. 



Eastern 

and 
north- 
eastern 

Ger- 
many. 



Per cent 

7 



26 



Per cent. 
25.0 
28.0 
29. o 



25- 6 
13- 7 



29. 6 
97-3 



Central 
Ger- 
many. 



Per cent. 
26 



South 
Ger- 
many. 



Per cent. 
7-3 
3.0 
4- 2 

0.6 

8.2 
22. 3 

11. 6 
2.6 



Rhine- 
land- 
West- 
phalia. 



Per cent. 
32. 2 

40. o 
28. 2 

6.5 

27.5 
3- 2 

13.8 



TO 



Renewal of Reichsb ank Charter 

VII. DEPOSITS OF THE CREDIT BANKS — PUBLICATION 
OF THEIR STATEMENTS — PRIVATE BANKERS — PUBLIC 
CRITICISM. 

The inquiry commission postponed its discussion of 
the deposits of the private credit banks, and we confine 
ourselves to a few remarks on that subject. The com- 
bination of taking in deposits, granting credits and 
financing, which prevails among our banks, was without 
doubt invaluable in promoting the economic progress of 
the last decades. The natural course of events may be 
trusted to bring about a separation of these different 
activities that will be sound and lasting. The larger 
banks might proceed in that direction at once, although 
it is doubtful whether such a step on their part would be 
immediately followed by the practical gain which advo- 
cates of that policy expect. A general and compulsory 
separation, if prematurely carried out, might lead to 
serious consequences, and the Government lost no time in 
informing the inquiry commission that it did not contem- 
plate enforcing such a change. The only question sub- 
mitted to discussion was whether it was necessary to 
insure the security and quick convertibility of deposits 
and savings by an act of legislation. It remains to be 
seen what other practical suggestions the inquiry commis- 
sion will make. The commission knows, as well as we 
do, that it would not be feasible to treat alike all the con- 
cerns which accept deposits, if for no other reason than 
that they are incorporated in so many different forms 
(banks, bankers, savings banks, cooperative institutions, 
etc.), and that it would scarcely be possible to differ- 

71 



National Monetary Commission 

entiate between deposits and savings on the one hand and 
ordinary credit balances on the other. Preferential 
treatment of genuine depositors would either inflict an 
injury upon the other creditors and thus hold up our 
economic progress, or else would not be a sufficient pro- 
tection to those for whose benefit it would be instituted. 
Supposing that laws could be framed which could be 
depended upon not to destroy Germany's vital economic 
interests and yet not to fail of their object through an 
amateurish timidity; even then, how, in the face of the 
ever-increasing number of credit institutions and their 
complex machinery, could we be sure of a strict observance 
of the laws and a proper system of supervision when our 
bank examiners have shown themselves so utterly inca- 
pable in the supervision of the mortgage banks, of which 
there are comparatively few, and whose machinery is much 
more simple? It would be dangerous to make the public 
believe that their money was absolutely safe because the 
banks where they kept their deposits were under the super- 
vision of the Government. The best laws are liable to 
violation. Transgressions might occur from careless busi- 
ness methods, which, unfortunately, are not infrequent. 
No law could afford protection against fraudulent malversa- 
tions, which, starting with unsuccessful attempts "to get 
rich quick" and proceeding to minor offenses, grow to 
larger proportions step by step. The cases of the Leip- 
ziger Bank, the Spielhagen banks, and the Pomeranian 
Bank afford ample illustration of this truth. No law can 
be framed so as to free men from the duty of watching with 



72 



Renewal of Reichsb ank Charter 

their own eyes and on their own responsibility those to 
whom they give confidence or money. 

The great banks in Berlin will soon begin publishing state- 
ments once in two months, so as to facilitate such watching 
of their affairs. One can hardly expect these banks to 
publish the " detailed balance sheets " suggested in the list 
of questions which was submitted to the inquiry commis- 
sion. The work would absorb too much time and money. 
The statements which have been promised will for the pres- 
ent satisfy all requirements. It must not be assumed, how- 
ever, that frequent publication of these statements will of 
itself give greater security to the depositors, but, if care- 
fully analyzed and compared, they will yield valuable 
information. Of course the figures will not reveal what 
is really behind them — whether the bills discounted con- 
sist of quickly realizable bankers' and commercial bills, 
or to what extent they represent dubious outstanding 
accounts; what the quality of the other debit items may 
be; how many of the securities could be sold at short 
notice if necessary; whether the liabilities become due on 
call or within a short time, or were entered into for longer 
periods, or whether they are merely transitory obliga- 
tions, etc. These defects, however, do not render annual 
reports worthless, nor do they speak against the publica- 
tion of more frequent statements. On the contrary, " win- 
dow dressing," so long as it was done only once a year, may 
have been an easy task; but to " dress up" an account 
which is rendered every month or two would hardly be 
worth while, if it were not altogether impossible. State- 
ments issued at frequent intervals during the year show 



73 



National Monetary Commission 

at once whether the December statement was in any way 
"doctored." This will gradually cure the temptation to 
"beautify" balance sheets. It will also become a thing 
of the past for long-sighted financial operations involving 
large amounts of money to be turned down toward the 
end of the year, but immediately afterwards taken up in 
the expectation that the transaction can be wound up 
before the next report is due. The new practice will deter 
the financial leaders from plunging light-heartedly into 
new commitments, but it need not be feared that the banks 
will refuse any legitimate demands for accommodation. 
The lively competition among our banks makes it safe to 
say that if any credits are withheld they are refused for the 
very good reason that the risk is not desirable. 

So far nearly all the members of the Reichsbank clear- 
ing house in Berlin have promised to publish their state- 
ments every two months, and the clearing house will in 
future admit to membership no institution which does not 
bind itself to follow a similar practice. Private bankers 
are exempt from this ruling. It would have been gratify- 
ing, and beneficial to their own interests, if they too had 
adopted the same plan, but we have to admit that in 
foreign countries also private banks do not as a rule pub- 
lish such statements. While England was disturbed over 
the Baring crisis, some bankers adopted that policy, but it 
failed to become a general rule. The wealthiest and most 
respected banking firms are the very ones who do not take 
kindly to the idea. They do not want to disclose their 
resources, and it is certainly not in the interest of the public 
to force such private firms as still exist to emigration, 



74 



Renewal of Reichs b ank Charter 

liquidation, or incorporation. The absorption of private 
concerns by the big banks, the growth of these monster 
institutions, and the indirect consequences of this con- 
centration as shown in the banking business — all this has 
come about with such swiftness that the tendency must 
not be accelerated any further by legislative interference. 
The future will reveal more clearly than the present that 
the mammoth form is not the ideal in the banking business. 
We shall also learn that we can not light-heartedly dis- 
pense with the services of intelligent private bankers. 
Sooner or later these men will prove most valuable, as 
they are not forced by the mass and pressure of busi- 
ness — like the managers of the big banks — to rush through 
their work, but retain enough leisure for profound study 
and careful consideration of difficult financial problems, 
giving their ideas time to mature and retaining the fac- 
ulty of constructive thought. 

The Berliner Handels Gesellschaft intends to refuse the 
bimonthly publication of its statement on the plea that 
it maintains no branch offices in Berlin to attract deposits. 
This contention is hardly sound, as the Berliner Handels 
Gesellschaft obtains its share of foreign deposits just the 
same as other Berlin banks; and we do not think it will 
be able to keep up its defiant attitude very long. It is 
expected that the provincial clearing-houses will in their 
own interest find it advisable to adopt the new method. 
The publication of their statements ought to be a good 
advertisement for the banks, as it reaches all classes and 
impresses them with the large figures on both sides of the 
account — those of the deposits already made, and those of 



75 



National Monetary Commission 

the investment of the funds. In fact it is not at all im- 
probable that firms of questionable standing, who least 
deserve the confidence of the public but know how easily 
small capitalists are fascinated by the title "bank," will 
resort to publications of that kind in order to attract 
savings and deposits. It is therefore of great impor- 
tance that the new statements be carefully analyzed by 
the public. This will be beneficial to the interests of 
depositors and banks alike. 

Three decades ago, when the Frankfurter Zeitung first 
began to analyze the published reports and look into the 
convertibility of the reported assets, the corporations 
thus criticised raised strong objections. Gradually the 
objections were dropped, and instead we received praise 
for teaching the German public how to study and critically 
analyze such reports. As another result of our work 
the corporations themselves increased their efforts to 
maintain a sufficiently liquid state — the industrial corpo- 
rations because they did not want to become too much 
indebted to their bank, and the banks that furnished 
accommodations because they did not want to lock up 
their depositors' funds indefinitely. Our method of 
analyzing balance sheets has now become common 
property among the press and the public, the Government 
and the parliaments. The inquiry commission has ad- 
journed its further deliberations on the protection of 
depositors until next year. The credit banks will by 
that time have started publishing their statements at 
short intervals, and the commission will therefore have 
more information to go upon. It will have to be borne 



76 



Renew a I of Reichsb ank Charter 

in mind, however, that the regularly published statements 
may be misleading, whether this be caused by accident 
or on purpose. Nor will this new departure satisfy all 
wishes. The banks are not compelled to itemize their 
obligations on bills rediscounted nor to explain items 
which are not easily intelligible to the outsider. It would 
be necessary to change our corporation laws in order to 
force them to do that, and legislation should keep away 
from that difficult subject as long as possible. Painful 
experience has shown what harmful results may be caused 
by such interference. It rests with the banks themselves 
to go ahead and introduce in their periodical statements 
and annual reports the uniformity and instructive com- 
ments which are needed so urgently. The promised 
reforms are welcome as a first step, and if further progress 
in the same direction be made, the bank inquiry will 
indeed have achieved most commendable results. 



77 



II. 

Draft of a Bill for the Amendment of the 
German Bank Act. 



79 



[For No. 1 1 78.] 

DRAFT OF A BILL FOR THE AMENDMENT 
OF THE GERMAN BANK ACT. 



j* 



I, WlIvUAM, BY THE GRACE OF GOD GERMAN EMPEROR, 

King of Prussia, etc., issue in the name of the Em- 
pire the following decree, subject to the assent of the 
Federal Council and the Imperial Diet: 

Article I. 

§ 24 of the Bank Act of March 14, 1875 (Reichs-Gesetzbl., 
p. 177), shall read as follows, article 2 of the act of June 7, 
1899 {Reichs-Gesetzbl., p. 311), being canceled: 

Of the total net profit of the Reichsbank ascertained 
at the close of the year: 

(1) a regular dividend of 3^ per cent of the capital 
stock is first to be paid over to the shareholders; 

(2) of the remainder one-fourth is to be handed over 
to the shareholders and three-fourths to the Imperial 
Treasury; of this balance, however, 10 per cent is to be 
assigned to the surplus, the amount being contributed in 
equal parts by the shareholders and the Imperial Treasury. 

If the net profit does not amount to 3^ per cent on the 
capital stock the deficiency is to be made up out of the 
surplus. 

Whenever an issue of shares of the Reichsbank yields 
a premium, the sum thus realized is to be assigned to the 
surplus. 

8 3703 — IO 6 81 



National Monetary Commission 

Dividends unclaimed after a lapse of four years from 
their date of maturity shall accrue to the bank. 

Article II. 

The following provision takes the place of article 5 of 
the act of June 7, 1899 (Reichs-Gesetzbl., p. 3 11 ): 

The share of the Reichsbank, as provided by the 
supplement to § 9 of the Bank Act, in the aggregate 
amount of the uncovered tax-free note circulation, in- 
clusive of the shares of the banks listed under Nos. 2 
to 12, 15 to 17, and 20 to 33, which have meanwhile 
reverted to the Reichsbank, is fixed at 550,000,000 marks, 
while at the same time the aggregate amount is increased 
to 618,771,000 marks. 

In the reckoning to be made for taxation purposes in 
connection with the statements appearing at the end of 
March, June, September, and December (§ 10 of the Bank 
Act) , the share of the Reichsbank is increased to 750,000,000 
marks and. the aggregate to 818,771,000 marks. 

Article III. 

The notes of the Reichsbank are legal tender. Other- 
wise the provisions of § 2 of the Bank Act remain un- 
changed. 

Article IV. 

I. In § 18 of the Bank Act the words "legally current 
German money" are replaced by the words " German 
gold coins." 

II. § 19, section 1, of the Bank Act shall read as 
follows : 



82 



Renewal of Reichsb ank Charter 

The Reichsbank must accept in payment at their full 
nominal value the notes of the banks designated by the 
Imperial Chancellor according to the terms of § 45 of 
this act, as long as the issuing bank punctually fulfills 
its duty of redeeming its notes. The Reichsbank must 
accept these notes in Berlin as well as at its branches 
in cities of more than 80,000 inhabitants and also at the 
branch office established in the place where the note- 
issuing bank is located. 

Under the same assumption the Reichsbank is obliged 
to give its notes in exchange for the notes of each of the 
aforementioned banks at its branches within the state 
that has authorized them to issue notes, as far as the 
note reserves and needs of the branch offices will permit it. 

The notes accepted or exchanged according to sections 
1 and 2 may be presented by the Reichsbank only for 
redemption or in payments to the bank that issued 
them, or in payments in the place where the bank has 
its principal seat. 

Article V. 

I. In § 8, section 2, of the Bank Act following the 
word "drafts" in No. 2 are inserted the words "and 
checks." 

II. In § 13 of the Bank Act following the words "are 
liable" in No. 2 are inserted the words "also checks, 
for which at least two guarantors known to be solvent 
are sureties." 

III. In § 17 of the Bank Act following the words 
"are surety" are inserted the words "or checks, for 
which at least two persons known to be solvent are liable." 

83 



National Monetary Commission 

IV. In § 32, section 1, of the Bank Act following the 
words "relative to the purchase and sale of gold, bills" 
is inserted "checks." 

V. After § 47 of the Bank Act, the following amend- 
ment is inserted as § 47a: 

§ 47a. For those private note banks to which the 
restrictive provisions of § 43 do not apply the decrees 
of § 17 are in force in regard to the covering for their 
outstanding notes. 

Article VI. 

I. Article 6 of the act of June 7, 1899 (Reichs-GesetzbL, 
p. 311), is remodeled as follows: 

To § 13 of the Bank Act No. 3 under (6) is added, 
following the words "of the market value," "on the 
same footing with these mortgage bonds are the deben- 
tures of domestic incorporated mortgage institutions 
made out to bearer, as well as those debentures made 
out to bearer of the other aforementioned institutions 
and banks which have been issued against loans made 
to domestic municipal corporations, or against the ac- 
ceptance of a guarantee by such corporations." 

II. In § 13 of the Bank Act the following provision is 
inserted under No. 9: Interest-bearing loans for not 
longer than three months may be made on the security of 
claims which are entered in the imperial register of debts 
or in the state register of a German state. The maximum 
amount of such loans is to be three-fourths of the market 
value of the government bonds for which such claims 
may be exchanged. 



84 



Renew a I of Reichsb ank Charter 

III. Following § 20 of the Bank Act are inserted the 
following provisions as § § 20a and 206 : 

§ 20a. If the lien on a claim entered in the imperial 
register of debts or the state register of a German state 
(§ 13, No. 9) is to be recorded in the public register of 
debts in favor of the Reichsbank, it is sufficient to have 
the motion certified to by the persons whose signature, 
according to § 38, will render the Reichsbank liable. 
Where § 38 demands the signatures of two members of 
the Reichsbank Directorate, other officers of the Reichs- 
bank, made known to the board of the register of debts 
by the bank, will be permitted to certify. 

The provisions of § 183 of the law relative to matters 
of voluntary jurisdiction apply to the certification. 

§ 206. If a lien has been entered in the register of 
debts in favor of the Reichsbank (§ 13, No. 9), the 
bank acquires the lien even if a third party should have 
a right to the claim, and the lien takes precedence over 
the prior lien of a third party unless the claim of the 
third party was registered at the time of the registration 
of the lien in the register of debts, or was at that time 
known to the Reichsbank or was not known through gross 
negligence. 

Should the debtor be dilatory in paying the debt 
secured by the lien, the board of the register of debts is 
empowered and bound to hand out to the Reichsbank, 
even without proof of such delay, government bonds 
payable to bearer, against cancellation of the registered 
Hen or part of the lien, unless there exist a legal order 
prohibiting such delivery to the Reichsbank, or unless 

85 



National Monetary Commission 

there are recorded in the register of debts rights of third 
parties or restrictions in favor of third parties which 
were registered prior to the Hen of the Reichsbank. The 
hen is also liable for the expenses incurred in the delivery 
of the bonds. 

The board of the register of debts must inform the 
Reichsbank of subsequent entries when the bonds are 
handed out. 

The provisions of § 20 apply to the satisfaction of the 
claims of the Reichsbank through the bonds handed out 
to it by the board of the register of debts. 

Article VII. 

The following provision is substituted for § 22 of the 
Bank Act: 

The Reichsbank is obliged to take charge of the business 
of the Imperial Treasury without compensation. 

The Reichsbank is empowered to take charge in like 
manner of the business of the treasuries of the federal 
states. 

Article VIII. 

Articles 3, 4, 5, and 6 of this act become operative on 
January 1, 19 10; the remaining articles will take effect on 
January 1, 191 1. 

Given under our own hand and imperial seal. 

EXPLANATORY BRIEF. 

In accordance with § 41 of the Bank Act of March 14, 
1875 (Reichs-GesetzbL, p. 177), the Imperial Government 
reserved to itself the right, after giving one year's notice, 
either to liquidate the Reichsbank (the first date being 

86 



Renewal of Reichsb ank Charter 

January i, 1891, and after that every ten years) and 
to acquire its real estate at its book value, or to acquire 
all of the shares of the Reichsbank at their nominal value. 
The consent of the Reichstag has to be obtained for an 
extension of time. 

The Imperial Government has not as yet exercised its 
right to give notice of the termination of the existing 
status. The current term of ten years will terminate on 
December 31, 19 10; the last day for notice to be given 
is December 31, 1909. 

There is as little reason now as there has been heretofore 
to make any changes in the organization of the Reichs- 
bank created by the Bank Act. The constitution of the 
Reichsbank has effectually stood the test during its life 
of more than thirty years, even in the face of the extraor- 
dinary strain to which the institution was subjected by 
the great demand for capital and money which mani- 
fested itself in the years 1906 and 1907. 

This bill therefore leaves unchanged the tried funda- 
ments of the bank's constitution. While upholding the 
existing banking system, it embodies provisions designed 
to meet the increasing needs of business. 

In the first place, the purpose of the bill is to enable 
the Reichsbank to exert its activity on a larger scale. 
This is to be accomplished through the reopening and 
gradual increase of the surplus (art. 1) as well as through 
the elevation of the limit of the tax-free note circulation 
(art. 2). Furthermore, the bill looks to the stability of 
the currency by making the notes of the Reichsbank legal 
tender (art. 3). In connection therewith it gives a larger 



87 



National Monetary Commission 



sphere of usefulness to the notes of the four private banks 
of issue still in existence (art. 4). With reference to the 
act of March 11, 1908, relative to checks (Reichs-GesetzbL, 
1908, p. 71), the bill authorizes the Reichsbank and the 
private banks of issue to purchase checks (art. 5) . Finally, 
it increases the kinds of collateral on which the Reichs- 
bank may make loans (art. 6), and substitutes for § 22 
of the Bank Act, in regard to the obligation of the Reichs- 
bank to take charge of the business of the Imperial 
Treasury, a new provision which removes any doubt 
concerning the meaning of § 22 (art. 7). 

I. 

The Reichsbank's own resources consist of the capital 
stock and the surplus. The capital, which in the begin- 
ning was fixed at 120,000,000 marks, was increased by 
Article I of the act of June 7, 1899 (Reichs-GesetzbL, 
p. 311), to 180,000,000 marks. The surplus has, through 
its reopening provided for in article 2 of that act, as well 
as through the addition of the premium realized on the 
issue of shares of the Reichsbank, been brought up to 
64,814,000 marks. Thus the Reichsbank's own resources 
amount at the present time to 244,814,000 marks. The 
funds of the other largest European banks of issue com- 
pare as follows: 





Bank of 
France. 


Bank of 
England. 


Bank of Aus- 
tria-Hungary. 


Bank of 
Russia. 


Capital _ . 


Francs. 
190,502,314 
34.513. 194 


Pounds. 

i4.553.ooo 
3, 000, 000 


Crowns. 

210, 000, 000 
i5.305.349 


Rubles. 
50.000, 000 
5, 000, 000 






TotaL 


225, 015, 508 


i7.5S3.ooo 


225,305,349 


55, 000, 000 




In German currency (marks) 


182, 262, 561 


358,607,790 


i9i.5o9.547 


118, 800, 000 



88 



Renewal of Reichsb ank Charter 

Thus the resources of the Reichsbank are exceeded 
only by those of the Bank of England. This bank, how- 
ever, as well as the Bank of France, and the Bank of 
Austria-Hungary to some extent, has invested its cap- 
ital in loans to the State or in government bonds, while 
the Reichsbank has its capital fully at its disposal for 
the performance of its actual tasks. 

In deciding the question as to whether nevertheless a 
further increase of the resources of the Reichsbank is 
desirable, it should be borne in mind that in the case of 
a central bank of issue its own funds are of less impor- 
tance than they are in the case of other banking institu- 
tions; they serve principally as a guaranty fund for the 
creditors of the bank while the working capital is created 
through the notes issued and the funds deposited in the 
bank. The experience of all the banks of issue prove 
this. As a guaranty fund for the creditors of the Reichs- 
bank its present capital is fully sufficient. The bank 
does not require an increase of its resources for the task 
directly laid upon it as a bank of issue and for the sake 
of the bulk of its business resulting from this capacity. 
Such an increase would lead, however, to an improve- 
ment in its condition, although, considering the aggregate 
of the liabilities of the Reichsbank, particularly in the mat- 
ter of outstanding notes and outside funds, the condition of 
the Reichsbank would not be greatly affected even by a con- 
siderable increase in the capital. The supposition that an 
increase in the capital would rind immediate expression in 
an increase in the metallic stock of the Reichsbank is 
erroneous. At any rate there is no guaranty that the 



89 



National Monetary Commission 

shares disposed of within the country will be paid for in 
gold. Very likely the payments would be made principally 
through the medium of bank notes or by means of deduc- 
tions from current accounts, which would for this pur- 
pose have been strengthened through the discounting of 
bills or the obtaining of loans on collateral. Thus pay- 
ments would either be made from the funds of the Reichs- 
bank itself or the money be taken from the currency 
in circulation, which latter withdrawal in turn would, in 
part at least, have to be made good by recourse to the 
Reichsbank. An increase in the capital of the Reichs- 
bank would not therefore permanently increase its specie 
reserves. An increase in capital will not influence the 
rate of discount, at least not for any length of time. It 
might have a temporary influence, but it would only tend 
toward dearer money. The original capital of a bank of 
issue is of no importance with respect to the rate of dis- 
count, which is governed by the state of the money 
market at large. Considering the large sums circulating 
in the money market, the capital of the Reichsbank can 
not, even if increased considerably, have an important 
influence on this market, the more so as it has no direct 
connection with the metallic stock of the Reichsbank. 

Neither does the Reichsbank need its own capital for 
the foreign exchange business — the purchase of foreign 
bills — the importance of which with respect to the dis- 
count policy of the bank is universally acknowledged. 
This business can be done exclusively with its own notes. 
From this point of view, therefore, an increase in the 
capital is not necessary. 



90 



Renewal of Reichsb ank Charter 

The Reichsbank requires a working capital of its own 
for investment in real estate or in securities which are 
not a legal covering for notes, and especially for its loan 
business, and the discounting of treasury bills, and for 
no other purpose. For this branch of its activities, how- 
ever, the deposits may be employed in addition to the 
capital and surplus. Appendix I will show that even at 
the times of the greatest strain the bank's own funds plus 
the deposits have exceeded by far the aggregate of loans 
and of the treasury bills discounted, while on an average 
during the year the original capital alone sufficed for 
these investments, so that the surplus was available for 
the real estate account, whose development may be ascer- 
tained from Appendix II. Only for the remainder of 
the assets (credits with foreign correspondents, nonin- 
terest-bearing advances in connection with gold impor- 
tations) was it necessary to employ part of the deposits. 

Although up to the present time the Reichsbank's own 
funds have thus sufficed for the purposes for which they 
are intended and the necessity of adding to them does 
not make itself felt at present, it is of course impossible 
to tell whether the operations of the bank will not develop 
in future years to an extent which would render desirable 
the existence of larger funds of its own. An increase in 
the volume of loans, in particular, is quite possible, and 
moreover, it can hardly be expected just now that the 
demands upon the bank in connection with treasury 
bills will decrease. It has happened repeatedly (see 
Appendix I) — and this is a contingency that may of 
course occur in future — that the maximum demands on 



91 



National Monetary Commission 

the Reichsbank in both these connections have been 
made at the same time and perhaps at a time when the 
volume of deposits has been below the average. Further- 
more an increase in the operations of the Reichsbank will 
naturally result in an increase of the other assets, those 
not available as covering for note circulation, particu- 
larly the real estate account, the credits with foreign 
correspondents, and the noninterest-bearing advances in 
connection with gold purchases. For these reasons it is 
advisable to consider, even at the present time, an in- 
crease *in the funds of the Reichsbank, based on these 
possibilities. 

For this purpose, on the one hand, the increase of the 
original capital, on the other, the strengthening of the 
surplus, must be considered. As regards the significance 
of its own resources for the Reichsbank, it makes no 
difference which of the two funds is increased ; both have 
the same tasks to accomplish. The only question is 
whether the increase of the original capital or the strength- 
ening of tjhe surplus will be the best means of augmenting 
the capital. 

In view of the possibility of strengthening the surplus 
by gradual additions and considering the status of the 
surplus as distinguished from the original capital, it seems 
advisable to choose the method of strengthening the 
surplus. This would achieve for the Reichsbank the same 
results that an increase of the original capital would bring 
about, while presenting in a lesser degree the disadvantages 
of the latter course. 



92 



Renewal of Reichsb ank Charter 

First of all it is impossible that an increase of the 
surplus, effected through yearly assignments from the net 
profits of the Reichsbank, should have a disadvantageous 
effect upon the money market, such as might result from 
the increase of the capital at one stroke. The enlarge- 
ment of the resources of the Reichsbank through yearly 
additions out of the net profits is better adapted to the 
development of business than the augmentation of the 
original capital by means even of several successive addi- 
tions. While an enlargement of the capital makes it 
more difficult for the Reichsbank to adjust its business to 
general economic conditions increases the danger that the 
capital could not be used profitably in times of redundant 
money, this objection does not hold in the case of an 
increase of the surplus, as no interest is paid on it. Al- 
though the management of the Reichsbank has never laid 
particular stress on the obtaining of especially large 
profits, it is, on the other hand, its duty to see to it that 
the profits rise to their due level relatively to existing 
conditions. It would be a mistake to assume that the 
profits which the last annual statement shows as a result 
of peculiar economic conditions will be permanently 
realizable. On the contrary, periods of cheap money will 
of themselves bring about a decrease in dividends. It is 
not altogether impossible that at times when money is 
very cheap the Reichsbank, whose sphere of operation will 
become more limited with the growth of the national 
wealth, the constant expansion of other credit institu- 
tions, etc., will be compelled to draw upon the surplus for 
the distribution of the regular dividend of 3% P er cent. 



93 



National Monetary Commission 

This possibility would be still greater in case of an enlarge- 
ment of the actual capital and might result in a permanent 
drop in the value of the shares of the Reichsbank below 
their rate at the time of emission, possibly even below their 
par value. Such a drop in the market value of the shares 
would not only injure the credit of the Imperial Govern- 
ment, but would also shake the confidence of the nation 
in the Reichsbank and thereby in the stability of the 
German monetary standard, which would react unfavor- 
ably upon the entire economic life of Germany. 

For these reasons the bill proposes to effect the increase 
of the Reichsbank 's own funds, which is acknowledged to 
be desirable, by means of additions to the surplus. 

II. 

The system, created by § 9 of the bank act, of indirectly 
limiting the volume of notes in circulation by imposing a 
tax of 3 per cent on the amount of notes issued over and 
above a sum which exceeds the cash reserve by a certain 
amount (stipulated separately for each bank of issue) , has 
been shown to have worked perfectly well by the experi- 
ence of the many years that have elapsed since the 
establishment of the Reichsbank. Although a certain 
indirect connection between the limit of untaxed note 
circulation and the action of the Reichsbank in regard to 
the discount rate must be admitted in so far as the exceed- 
ing of the contingent and the raising of the discount rate 
presuppose increased demands upon the Reichsbank, a 
direct influence on the discount rate through the fixing of 
the note contingent can not be expected. In fact, the 



94 



Renewal of Reichsb ank Charter 

management of the Reichsbank has never allowed the tax 
imposed on the excess circulation to have any decisive 
influence on its discount policies. As therefore the dis- 
count policies of the Reichsbank will not be favorably 
affected by the elimination of the contingent, there is no 
reason to abandon this system. On the other hand, it 
seems altogether desirable to maintain the contingent 
system, as the exceeding of the contingent has more and 
more developed into a danger signal heeded by business 
men. 

The present amount of the tax-free note contingent can, 
however, no longer be regarded as sufficient. As has 
already been stated in giving the reasons for the draft of 
the act relative to the amendment of the bank act of June 
7, 1899 (Reichstag Documents, No. 95, tenth legislative 
period, first session 1898-99, pp. 8, 9), the conditions on 
which the adjustment of the tax-free note contingent of 
the Reichsbank was originally based no longer exist, nor 
could the increase of the contingent provided for in the 
act mentioned above keep up with the development of 
business. Appendix III shows how the amount by which 
the contingent has been exceeded has been steadily grow- 
ing since 1901. The figures for 1906 prove the inadequacy 
of the present contingent, showing that it was exceeded 
seventeen times with a maximum excess of 572,644,757 
marks, but this is evinced above all by the events of the 
year 1907. That year shows no less than twenty-five 
instances, of which the excess reported on December 31 
reached the amount of 625,974,363 marks, a maximum 
never reached before. At the same time it happened for 



95 



National Monetary Commission 

the first time in 1907, by reason of the large demands of 
business, that the Reichsbank had a note circulation which 
even in its yearly average exceeded the contingent, and 
that by more than 58,000,000 marks. Although one can 
not consider these two years as a general demonstration, 
because they were periods of exceptional financial strain, 
it has become evident that the present contingent of the 
Reichsbank is insufficient for the increased demands of 
business due to the increase of the population and the 
accelerated economic development in Germany. Under 
such conditions the present limitation of the Reichsbank's 
note circulation ceases to have any value. The too 
frequently resulting transgression of the normal limit 
causes a useless disturbance of business. 

The increase of the tax-free note contingent therefore 
appears to be a measure the justification and necessity of 
which are to be found in the increased development of our 
national economy. In establishing this increase the fact 
has to be reckoned with that the demands on the Reichs- 
bank are regularly made to an especially large extent at 
the quarter days.. The condition, resulting from custom, 
that at the beginning of a quarter large liabilities have to 
be met — for instance, in regard to mortgages, rent, inter- 
est, and salaries — causes at those times an extraordinarily 
heavy demand for instruments of payment, which it is the 
Reichsbank's unavoidable obligation to meet. The pres- 
ent contingent has proved absolutely insufficient in view 
of this increased demand, which has nothing to do with 
the fluctuations in the general economic situation. It is 
particularly on account of the periodical excess at the 



96 



Renewal of Reichsb ank Charter 

quarter days that the Reichsbank has had to pay con- 
siderable taxes on its notes. 

Such restriction in the satisfying of legitimate needs is 
unjustified and not in accordance with the intent of the 
contingent system. It therefore appears necessary to 
adapt the contingent to the demands of business by a 
further increase operative at the quarter days only. 

A corresponding increase of the tax-free note con- 
tingent of the private banks of issue can not be considered, 
for reasons explained in detail in the draft of the act of 
June 7, 1899 (Reichstag Documents, 1898-99, I, No. 95, 
p. 9) , on the occasion of the last increase of the note con- 
tingent of the Reichsbank. 

III. 

§ 2 of the Bank Act states expressly that there is no 
obligation to accept bank notes for payments which 
legally are to be made in currency. As can be seen from 
the report of the eighth commission on the draft of a 
bank act (No. 195 of the Documents, second period of 
legislature, second session, 1874, P- 22 )> when the Bank 
Act was under discussion, the suggestion to make the 
notes of the Reichsbank legal tender did not meet with 
general approval. The report of the commission assigns 
as a particular reason for this the circumstance that such 
a measure could not be considered because shortly before, 
at the time of the discussion of the bill regarding imperial 
treasury notes, this quality had been denied the notes 
issued directly by the Imperial Government. The disin- 
clination shown here to making the notes of the Reichs- 

83703—10 7 97 



National Monetary Commission 

bank legal tender can be explained principally by the 
earnest desire then prevailing to do away with the existing 
paper regime and to place the metallic currency on a firm 
foundation. This aim has been realized to such an extent 
that at the present time Germany's metallic circulation, 
and particularly that of gold coin, is abundant and suffi- 
cient for all demands of trade. On the other hand, bank 
notes also are regularly taken in payment, and for pay- 
ments of large amounts they are used almost exclusively. 
It can not be denied that the present legal status of this 
mode of payment is somewhat uncertain. The legal dis- 
advantage of the existing situation for the debtor is, in 
the first place, that the creditor has the privilege to refuse 
the acceptance of bank notes, which may put the debtor 
into demur. Even if thus far there has been no trouble 
of any consequence in this connection, nevertheless such 
institutions which have to make numerous payments, 
banks especially, generally feel obliged for precautionary 
reasons to provide themselves with a considerable stock 
of gold in order to be prepared for any demand for gold 
that they may have to meet. 

Although the situation as created by § 2 of the Bank 
Act has not been such as to demonstrate the imperative 
necessity of an amendment of this provision, still the fact 
can not be overlooked that the present state of the law 
makes it possible that, as a result of contingencies that 
can not be foreseen, especially such as are connected with 
financial crises, our monetary intercourse will be very 
injuriously affected, in such a way as to threaten the 
depletion of the stock of gold in the Reichsbank. 



98 



Renewal of R etc hs b an k Charter 

The bill in making the notes of the Reichsbank legal 
tender, is simply giving a firm legal basis to the existing 
situation, i. e., the acceptance of notes as instruments of 
payment in all monetary transactions. The obligation of 
the Reichsbank to redeem its notes remains unchanged, 
as a matter of course. The essential characteristics of 
the bank notes — their security, the method of emission, 
the possibility of adapting the amount of their circulation 
to the fluctuating demands of the market — remain un- 
changed, as well as their legal character, which embodies a 
claim on the Reichsbank. The investment of the notes of 
the Reichsbank with the quality of a legal tender can not 
possibly result in any harm to the currency system, while 
it has the advantage of preventing trickish behavior on 
the part of creditors and of securing for critical times a 
discharge of pecuniary obligations in accordance with 
existing methods. 

In proposing this measure the bill follows the exam- 
ples of England and France. In England the notes of the 
Bank of England have been legal tender since January i , 
1834. In France the notes of the Bank of France were 
invested with this quality by the acts of August 12, 1870, 
and August 3, 1875. 

The conferring of the legal-tender quality upon the 
Reichsbank notes does not in any way affect the main- 
tenance of the gold standard, as is proved by the example 
of the Bank of England. In order to emphasize this more 
strongly, the words "legally current German money" in 
paragraph 18 have been replaced by "German gold coin." 
This expresses beyond a doubt that even a single note of 



99 



National Monetary Commission 

the denomination of 20 marks must be redeemed in gold, 
although the amount of 20 marks comes still within the 
limit up to which imperial silver coin is decreed a legal 
tender in article 9 of the currency act of July 9. 1873. 
(Reichs-Gesetzbl., p. 233.) That on the presentation of a 
number of 20-mark notes, the amount exceeding 20 marks 
must on demand be paid in gold, would, as it is, follow 
from the existing provisions pure and simple. 

In view of the fact that the private banks of issue are 
not permitted to issue any notes of the denomination of 
20 marks, it seems unnecessary to enact a provision with 
reference to them in accordance with the amendment of 
paragraph 18. The provision, therefore, in regard to the 
redemption of the notes of the private banks of issue 
remains unchanged — that is, according to § 44, section 1, 
No. 4, of the Bank Act, redemption has to be effected in 
legally current German money. The unambiguous lan- 
guage used leaves no doubt but that "current German 
money" means metallic coin solely, and not the notes of 
the Reichsbank which are to be invested with the legal- 
tender quality; this is, moreover, expressly confirmed by 
the tenor of paragraph 8, section 2, of the bank act, which 
mentions current German money as part of the metallic 
stock. 

Heretofore the Reichsbank has, indeed, as far as the 
provisions of § 186 allowed it free action, complied with- 
out exception to all legitimate demands of business. The 
necessity of maintaining unimpaired credit of the bank 
notes and the absolute stability of the gold standard 
demands that this remain unchanged. The management 



Renewal of Reichsb ank Charter 

of the bank therefore will at all times earnestly endeavor 
in the discharge of the obligations imposed upon it with 
respect to redemption to act in accordance with the 
wishes of business. 

The action of the Bank of England is restricted by the 
provision that in payments made by the bank itself its 
own notes are not a legal tender. On account of the 
peculiar nature of the giro business (the system of pay- 
ments by means of transfers to, and deductions from, 
accounts current) and the large number of branches of 
the Reichsbank, there are serious objections to embodying 
a like provision in the bank act. The Reichsbank might 
otherwise be under the necessity, in the transfer of sums 
from one account to another, to make gold payments at 
its branches up to any amount, although it is altogether 
impossible for the bank to keep at all times and in all 
places gold reserves exceeding the regular demand in order 
to provide for such emergencies. Furthermore, the organ- 
ization of these branches, which are in most cases man- 
aged by a single official, necessarily limits the amount of 
their gold reserves. Until now such demands have not 
been made upon the Reichsbank; they may, however, 
occur in future. Under these circumstances the clause, 
which seems fair as regards the Bank of England, in view 
of its different business methods and the small number 
of branches, appears inapplicable in the case of the 
Reichsbank, just as, for like reasons, it could not very 
well be applied in the case of the Bank of France. Fur- 
thermore, the obligation of the Bank of England to redeem 
its notes is limited in practice almost exclusively to Lon- 



IOI 



National Monetary Commission 

don, the obligation of its branches to redeem the notes 
issued by them being relatively of slight importance. 

It goes without saying that the Reichsbank will con- 
tinue in the future, as it has done heretofore, to endeavor 
to make all payments as far as possible in the kind of 
money desired by its clients. 

The objection raised by the commission which drafted 
the Bank Act against investing the notes of the Reichs- 
bank with the quality of a legal tender on the ground that 
this was denied to the imperial treasury notes can not be 
sustained. At the present time the imperial treasury 
notes, which, by the act of June 5, 1906 (Reichs-Gesetzbl., 
p. 730), have been limited to denominations of 5 and 10 
marks, count for very little now in the circulation com- 
pared to the large issues of the Reichsbank notes. It 
should be particularly noted in this connection that 
already at the time of the debates relative to the draft 
of the Bank Act in the year 1874, according to the 
report of the commission (Reichstag Documents, 1874, 
II, No. 195, p. 22), "a number of the members of the 
commission declared themselves to be of the opinion that 
it would be advisable to invest the notes of the Reichs- 
bank with the legal-tender quality, and that such a step 
would have great advantages and no disadvantages for 
the public." 

It is necessary in the interest of uniformity in the 
German currency system that the quality of a legal 
tender be reserved for the notes of the Reichsbank. If 
these privileges were to be extended to the notes of the 
private banks of issue, the result would be the creation 



Renewal of Reichsb ank Charter 

of various kinds of money for Germany, and the uni- 
formity of the German currency system, so laboriously 
acquired, would be again destroyed. Regard for the 
interests of the private banks of issue does not justify 
such a measure. In order, however, to enable the pri- 
vate banks to exploit the privilege of issue more thor- 
oughly, the bill provides that the Reichsbank shall not 
only continue to accept in payment the notes of the pri- 
vate banks according to paragraph 19 of the Bank Act, 
but shall also exchange them for Reichsbank notes within 
their natural zone of circulation. By means of this pro- 
vision, which insures to the holders of notes at all times 
the possibility of exchanging their notes for legal tender 
at all of the Reichsbank branches within their state 
limits, the notes of the private banks will be rendered 
much more available for the purposes of business than 
they have been up to the present. 

IV. 

The bill authorizes the Reichsbank and the private 
banks of issue to purchase checks. Since the act of March 
1 1 of this year, in relation to checks, has made it possible 
for the holder of a check to obtain legal protection for his 
claim, just the same as the holder of a bill, the funda- 
mental objections to the purchase of checks have been 
removed. In view of the altered economic conditions, 
the Reichsbank considers it desirable and even necessary 
that it be empowered to engage in the business of pur- 
chasing checks. Whether or to what extent it will make 
use of this authorization will depend mainly upon the 
development of the economic situation, the question 

103 



National Monetary Commission 

presenting some factors that have to be carefully con- 
sidered. 

Such an arrangement would offer to the public the 
advantage that the holder of a check payable in another 
city could get cash for it at any moment by having it 
discounted, whereas under the present method the 
amount is paid only when the check has been collected — 
that is, after a lapse of several days, and no liability is 
accepted by the bank for the presentation of the check 
for payment within the legal time limit. The discounted 
check, in accordance with its intrinsic purpose, would be 
presented for collection by the bank as quickly as pos- 
sible and its equivalent put at the disposal of the party 
presenting it by means of the giro (his account current 
being credited with the amount), the necessity of a cash 
remittance being thus avoided. 

It is to be expected that the purchase of checks by the 
Reichsbank will stimulate the use of checks and in gen- 
eral promote monetary intercourse without the employ- 
ment of cash. In the interest of the public such an 
extension is greatly to be desired. This new function 
of the Reichsbank would be fully in line with the task 
assigned to it in § 12 of the Bank Act to facilitate mone- 
tary settlements. 

V. 

According to article 6 of the act of June 7, 1899 {Reichs- 
GesetzbL, p. 311), debentures made out to bearer, issued 
against loans made to domestic municipal corporations or 
guaranteed by them, are placed on a level as regards 
their availability as collateral for loans with the bonds 

104 



Renewal of Reichsb ank Charter 

of agricultural, municipal, or other institutions under gov- 
ernment supervision, or of German mortgage banks. 
This extension of the class of securities against which 
loans may be made is based on the fact that these deben- 
tures offer fully the same measure of security as the bonds 
do and, in the general opinion of business men, are held 
to be their equal. (See Reichstag Documents, 1898-9, I, 
No. 95, p. 15.) The same applies to other debentures 
issued by agricultural, municipal, or other public mort- 
gage institutions, for the security of such paper is eo ipso 
established by the constitution of these institutions, 
which are invested with a public character. It seems 
advisable, therefore, to admit these debentures as col- 
lateral for loans, independent of the nature of the claims 
which serve as security. 

The bill makes, in addition, the claims registered in the 
imperial and state registers of debts available as collateral. 
The act of May 31, 1891 (Reichs-GesetzbL, p. 321), makes 
it possible for a holder of imperial bonds to convert 
them into registered debt of the Empire made out in the 
name of a particular creditor. The conversion is effected 
by registration in the imperial register of debts against 
delivery of the bonds. In case of cancellation of the 
registered claim the creditor receives bonds bearing the 
same rate of interest and of equal nominal value. A 
number of federal states have made similar arrangements 
in regard to their bonds. 

While, according to § 13, No. 36, of the Bank Act 
the holders of imperial and state bonds can secure loans 
on them at the Reichsbank, the Bank Act in its present 



105 



National Monetary Commission 

form does not permit of such loans against claims entered 
in the government register of debts. This in a measure 
places the holders of government bonds in a favored 
position relatively to those having credits in the govern- 
ment register of debts. Such a preference is not justified 
in view of the purely technical difference between the 
two classes of creditors. This disadvantage will natu- 
rally be felt more and more with the extension of the use 
of the public register of debts. Even now many financial 
institutions, particularly the savings banks and provi- 
dent societies, have invested a considerable part of their 
resources in registered claims. In order to enable them 
to utilize their registered claims for credit purposes 
without losing time through their reconversion into 
bonds, which loss of time might prove disastrous in times 
of crisis, it is urgently to be desired that the Reichsbank 
be authorized to loan on such claims. This will, at the 
same time, enable those creditors of the Government 
who are now in the habit of keeping large amounts of 
government securities permanently with the Reichs- 
bank, in order to borrow temporarily against them, to 
have recorded in their stead for such purposes a claim 
entered in the public register of debts, a remark being 
duly inscribed regarding its serving as security. This 
would relieve the Reichsbank of the custody of the 
securities and the tasks it would impose, and would 
simplify interest payments to the creditors of the state. 
The carrying out of this measure makes it imperative 
that the legal status of pledges of this kind be such that 
they will absolutely guarantee the security and liquidity 



1 06 



Renewal of Reichsb ank Charter 

of the lien. The general ordinances of the Civil Code 
re mortgage rights on claims are not sufficient for this. 
They would not protect the Reichsb ank in case of a 
previous assignment of the claim to a third party, that 
might not be recorded in the register of debts, nor 
against a prior unrecorded proof of the right of third 
parties to the claim. It is further not possible for the 
Reichsbank, according to the existing laws governing 
the register of debts, to demand the delivery of bonds, 
particularly without the participation of the holder of 
the claim in the transaction. For this reason, the bill, 
after the pattern of the act of March 22, 1893 (Reichs- 
Gesetzbl., p. 131), which at present is operative only with 
regard to the official bond of the Reichsbank employees, 
places the mortgaging of such a claim to the Reichsbank 
on the same footing with a mortgage on movables, and 
provides in case of tardiness on the part of the debtor 
for the immediate payment to the Reichsbank out of the 
amount of claim. 

The privileged position of the Reichsbank resulting 
from this is justified on the ground that the Reichsbank, 
as the ultimate source of money and credit in the country, 
must in critical times be the first to satisfy the demands 
of credit and because this institution alone can have 
anything to do with loans of the kind in question. For 
the rest the Reichsbank enjoys even at the present time 
through § 20 of the bank act certain privileges in the 
matter of realizing on pledged property; it enjoys these 
privileges in view of the importance which the liquidity 
of its investments has for the entire economic life of 



107 



National Monetary Commission 

Germany. At the same time the bill provides in the 
interest of the creditor of the Government an easier 
method of recording the mortgage by simplifying the 
regulations which are in existence in the various laws 
governing the register of debts, such as, for instance, 
those of paragraph 10 of the imperial register of debts 
and paragraph 10 of the Prussian law governing the 
state register, dated July 20, 1883 (Preuss. Gesetzsamml., 
p. 120), which require an attestation of the motion by 
a court or a notary, which is both laborious and costly. 

REMARKS RELATIVE TO VARIOUS POINTS. 
RE Article i. 

According to the bill the increase in the surplus is to 
be effected by the assignment to it of 10 per cent of the 
annual profits, after payment of a dividend of 2,H P er cent. 
Such a provision would mean a probable annual increase 
in the surplus fund of the Reichsbank of about 1,800,000 
marks, according to the estimate given in Appendix V, 
based upon the actual results of business. This incre- 
ment appears, on the one hand, to be sufficient; on the 
other, it precludes an excessive increase in the Reichs- 
bank's own funds for some time to come. The bill there- 
fore does not fix a limit to the increase, especially as, on 
the termination of the ten-years' period beginning January 
1, 191 1, an opportunity will' be given — in accordance with 
§ 41 of the Bank Act — to determine whether the fixing of 
a maximum amount should prove necessary or advisable. 
The bill provides further that the annual assignments to 
the surplus are to be borne in equal shares by the share- 

108 



Renewal of Reichsb ank Charter 

holders and the Imperial Government. In the absence 
of this provision three-fourths of the amount would have 
to be borne by the Government and one-fourth by the 
shareholders, while if, in accordance with § 41 of the Bank 
Act, the reserve should be distributed, the Government 
and shareholders would participate equally. Although 
for this reason alone the provision would be fair and 
reasonable, it is rendered still more so by the fact that, as 
the bill provides for an increase in the amount of the tax- 
free note contingent, the Government will henceforth suffer 
a considerable loss from the diminution in the amount of 
the tax. This is of all the greater importance, as the Gov- 
ernment is at present endeavoring to rind additional 
sources of revenue for its budget. We must remember 
besides that out of the profit of the Reichsbank a divi- 
dend of 3K per cent is guaranteed the shareholders by 
law; in proportion, therefore, as an increase of the bank's 
own funds tends to increase its sphere of activity and 
strengthens the foundations on which it rests, the results 
of such a measure will also be beneficial to the share- 
holders, particularly in regard to the market value of the 
shares. 

RE Article 2. 

The act of June 7, 1899, increased the tax-free note 
contingent of the Reichsbank to 450,000,000 marks, in- 
creasing at the same time the aggregate amount of the tax- 
free unsecured note circulation of all the banks of issue to 
541,600,000 marks. In the meanwhile, in accordance 
with § 9, section 2, of the Bank Act, the quotas of the 
Frankfurter Bank, the Bank for Siiddeutschland, and the 



109 



National Monetary Commission 

Braunschweigische (Brunswick) Bank (Nos. 12, 20, and 
24 of the supplement to § 9 of the Bank Act) have been 
added to that of the Reichsbank, whereby the share of the 
Reichsbank in the total contingent has risen to 472,829,000 
marks. The increase of the contingent of the Reichsbank 
to 550,000,000 marks, as proposed by the bill, would make 
it conform to the increased note circulation and suffice to 
prevent a too frequent excess outside of the quarter days. 

By reason of the great demands made regularly upon 
the Reichsbank on the quarter days, a considerably larger 
increase of the contingent is desirable. The tabulations 
of the cash reserves and the note circulation, which accord- 
ing to § 10 of the Bank Act must be made on the 7th, 
15th, 23d, and last of each month for the purpose of tax 
calculating, show such a large increase in the amount of 
the unsecured note circulation at the end of each quarter 
that the present contingent is exceeded by much larger 
amounts than that of the proposed regular increase in the 
contingent. The statements for the last of March, June, 
September, and December of each year show the highest 
figures. For these reporting days, therefore, the need of 
a further increase in the contingent is most urgent. As a 
remedy the bill proposes a further increase in the con- 
tingent of 200,000,000 marks for the quarter days. 

The increase in the tax-free unsecured note circulation 
thus provided for will in all probability suffice to prevent 
a too frequent and too large excess issue, which is to be 
deprecated in the interest of sound business. On the 
other hand, the increase is sufficiently moderate not to 
render nugatory the policy of restricting bank-note cir- 
culation. 



Renewal of Reichsb ank Charter 

RE Article 3. 

Article 3 cancels, as far as the notes of the Reichsbank 
are concerned, the present provision of § 2 of the Bank 
Act, which prescribes that in the case of payments which 
legally must be made in money bank notes need not be 
accepted. 

Re Article 4. 

The provision given under No. 1 expresses the obligation 
of the Reichsbank to redeem its notes at all times in 
German gold coin. 

While, furthermore, according to § 19 of the Bank 
Act, the Reichsbank is merely bound to accept the notes 
of the banks indicated by the Imperial Chancellor in con- 
formity with § 45 of this act at their full face value, in 
Berlin as well as at certain branches, as long as the issuing 
bank punctually discharges its obligation to redeem notes, 
the bill imposes the further obligation on the Reichsbank 
to exchange these notes against its own within their 
natural circulation territory, fixed by the Bank Act — 
that is, in each case within the State that has authorized 
the private bank to issue notes. This enables the holder 
of the notes of a private bank who is not in debt to the 
Reichsbank to hand them in at one of its offices and get 
Reichsbank notes in exchange. 

RE Article 5. 

Article 5 authorizes the Reichsbank to purchase checks. 
In view of the amendment of § 13, No. 2, of the Bank Act, 
checks of the class mentioned in § 13, No. 2, may by 
reason of the provision embodied in § 44, section 1, No. 1, 



National Monetary Commission 

also be purchased by those private banks of issue which 
are not subject to the restricting stipulations of § 43. In 
connection therewith the bill makes further amendments 
in some of the provisions of the Bank Act which are 
rendered necessary by this authorization. Checks, par- 
ticularly, will be permitted as cover for the notes under 
the same conditions that govern bills. In order to admit 
checks for note covering in the case of the private banks, 
a special provision has been inserted, § 47a. 

Re Article 6. 

Article 6, No. I, extends the class of securities available 
for collateral in favor of the debentures of incorporated 
mortgage institutions. This holds good also for the loan 
business of the private banks of issue. 

Article 6, No. II, authorizes the Reichsbank to grant 
interest-bearing loans for not longer than three months 
on the security of claims recorded in the imperial register 
of debts, or in the register of a federal state. Heretofore 
interest-bearing loans were limited to movable liens. The 
limiting of the loan to three-fourths of the market value 
of the bonds for which such a claim is exchangeable is in 
accord with the loan limit stipulated in § 13, No. 36, of 
the Bank Act. 

In order to facilitate the recording in the imperial 
register of debts, or the register of a federal state, of the 
liens to be entered in favor of the Reichsbank, it is pro- 
vided (§ 20a) that in place of the more rigorous form 
demanded by the laws relating to the register of debts it 
shall be sufficient to have the motion for registration of 



Renewal of Reichsb ank Charter 

the lien in the register certified to by the persons whose 
signature renders the Reichsbank liable. (§ 38 of the 
Bank Act ; ordinance of the Imperial Chancellor of Decem- 
ber 27, 1875, Zentralblatt filr das Deutsche Reich, p. 820.) 
In order to facilitate business the bill provides that in 
place of the two members of the Reichsbank Direktorium, 
other officers of the Reichsbank may be assigned by the 
Reichsbank Direktorium for the task of certification; 
they must be made known to the board of the register of 
debts. 

The provision in § 206 is designed to preclude the 
possibility that a third party may enjoin the Reichsbank 
on account of a prior assignment or mortgage which was 
neither recorded in the register of debts nor known to the 
Reichsbank or unknown through gross negligence. 

The provision in § 20b further empowers the Reichsbank, 
in case the debtor is dilatory, to apply to the board of the 
register of debts for government bonds against partial or 
total cancellation of the registered claim. For this the 
written motion of the Reichsbank shall suffice, and it shall 
not be necessary that any other person participate in it, 
particularly the creditor of the register of debts, as would 
be required by the laws relative to the register of debts. 
When such a motion is presented, the board of the register 
of debts shall not ask for evidence of any kind, particularly 
no proof of the tardiness of the debtor, and the board can 
decline such a motion only in so far as this is provided for 
in § 20b; in particular, the board is not permitted to 
decline to hand out the bonds on the score of liens which 
were entered in the register of debts only after the mort- 

83703—10 8 113 



National Monetary Commission 

gage in favor of the Reichsbank had been recorded, neither 
may it make use of the right which it would otherwise have 
of sequestering the bonds. 

After having received the government bonds from the 
board of the register of debts, the Reichsbank acquires, in 
accordance with §§ 1287 and 1293 of the Civil Code, a lien 
on them to which the provisions of the Code relative to 
liens on movable property apply ; as this is a case of a lien 
on movable property in connection with the business of 
loaning on security, the privileges accorded the Reichs- 
bank by § 20 of the Bank Act in regard to the enforcement 
of its claims in the matter of liens will naturally be ex- 
tended to the bonds thus handed over to it. 

Re Article 7. 

Paragraph 22 imposes upon the Reichsbank the obliga- 
tion to receive payments for account of the Imperial 
Goverment and to make them up to the amount of the 
government's balance without compensation for its 
services. This obligation was extended in § 11 of the 
acts relating to the Reichsbank of May 21, 1875 (Reichs- 
gesetzbl., p. 203), which makes it part of the business of 
the Reichsbank to take charge of the funds of the Empire 
without compensation and keep records of the payments 
accepted and made for account of the Empire. Doubts 
have repeatedly arisen as to the extent of the obligations 
which the Reichsbank has in this respect. The provisions 
of the present bill prescribe in indubitable terms that 
the Reichsbank shall transact the business of the Im- 
perial Treasury without compensation. In view of the 
business which naturally comes within the sphere of the 

114 



Renewal of Reichsb ank Charter 

Imperial Treasury, this can apply only to transactions 
of the kind connected with the treasury system. The 
words "business of the Imperial Treasury" will there- 
fore in the meaning of the bill be understood to include 
all fiscal transactions which the Imperial Chancellor 
assigns to the Imperial Treasury. § 35 of the Bank Act 
establishes beyond a doubt that payments are to be 
made by the Reichsbank for the Imperial Treasury only 
up to the amount of the balance in its favor in the bank. 
Otherwise the Reichsbank would be making advances 
to the Imperial Treasury, which is not permissible. Fur- 
thermore § 34 of the " Geschaftsanweisung fur die Reichs- 
hauptkasse," a issued by the Chancellor, fixes the mini- 
mum balance of the Imperial Treasury at 10,000,000 
marks for the giro or current account by means of which 
the entire business of the Imperial Treasury is to be 
carried on. The bill renders superfluous § 11 of the 

« This paragraph reads : 

By means of the giro account of the Imperial Treasury at the Reichs- 
bank the entire business of the former is done in such a way that the 
balance at the close of each day represents the credit balance of the 
government. 

The giro account of the Imperial Treasury is subject to the general 
regulations relative to the Reichsbank giro business; the minimum bal- 
ance is fixed at 10,000,000 marks, and anybody may make payments 
into the account at the Reichsbank and all its branches without having 
to pay any dues. Should the credit balance of the Imperial Treasury 
fall below the minimum limit, the Reichsbank Directorate may, in accord- 
ance with arrangements made, use Imperial Treasury notes whose equiv- 
alent is credited to the giro account. 

The giro-account customers of the Reichsbank must use the giro account 
exclusively as their medium for doing business with the Imperial Treasury. 
The Imperial Treasury must be informed by the giro customer or the 
payer who has no account at the Reichsbank of every transfer or every 
remittance to its giro account; if necessary, the name of the debtor is 
to be given. 



"5 



National Monetary Commission 

statutes of the Reichsbank, as the management of the 
balance of the Imperial Government at the Reichsbank 
and the bookkeeping and accounting for payments re- 
ceived and disbursements made for the Imperial Govern- 
ment are part of the functions of the Imperial Treasury. 
The privilege of the Reichsbank to undertake business 
for the treasuries of the federal states as long as such 
business is of a central nature, as in the case of the Im- 
perial Treasury, remains unaltered. 



116 



Renewal of Reichsb ank Charter 






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118 



Renewal of Reichsb ank 



Charter 



Appendix II. — Real estate and other assets of the Reichsbank. 



At the close of the year. 



1876. 
1877- 
1878. 
1879- 
1S80. 
1881. 
1882. 
1883- 
1884- 
1885- 
1886. 
18S7- 
1888- 
1889. 
1890. 
1891- 
1892. 
1893- 
1894- 
1895- 
1896. 
1897- 
1898. 
1899- 
1900- 
1901. 
1902. 

1903- 
1904- 
1905- 

1906- 
1907- 
1908. 



Value of real 
estate. 



Marks. 
13, 278, oco 
15, 628, 600 
17, 704, 600 
17. 95°. 6cc 
18, 622, 600 
18, 633, 000 
10, 244, 500 
19, 298, 500 
19.493. 500 
19. 663, 500 
19,888, 500 
20, 207, 500 

21, 113, 500 
21, 282, 50O 
21, 517, SOO 
22, 26l, SOO 
22,913, 500 

22,945. 500 
24. 293. 500 
29,857. 7co 
33, 196, 700 

33,452, 700 
35. 493. 7°o 
35. 623, 700 
36, 026, 000 
37, 267, 200 
40, 55?, 900 
42, 523,800 
45, 416, 700 
47. 509. 600 
50,095, 400 
54.787.400 
56, 989, 000 



Other assets.^ 



Marks 

9. 411. 

7.964. 

5. 104, 

5.804, 

ix. 35i. 

7. 284, 

5.288, 

4. 704. 

5,675, 

II. 299, 

5,75L 

26, 776, 

13. 115. 

11, 101, 

10, 274, 

21, 916, 

27, 096, 

42,588, 

43, 164, 

21,332, 

20,886, 

63,969, 

65,521, 

18, 764, 

33,872, 

43,869, 

32, 231, 

53,925, 

55,997, 

51.281, 

7L472, 

51, 206, 

108, 394. 



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000 
100 
200 
300 
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000 



o These are the amounts given in the annual reports of December 31 of each year 
sub "Other assets" reduced by the value of the leal estate. 



119 



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.2 | » | 9 



Renewal of Reichsb ank Charter 

Appendix V. — Annual increase in the surplus of the Reichsbank calculated 
on the basis of the net profits realized in the twenty years , 1888-1907, assum- 
ing an annual quota of 10 per cent. 



Year. 



Net profit. 



3 *A per cent Of the balance 



dividend on 
the capital. 



10 per cent to 
the surplus. 



1888 1 

1889 

1890 

1891 

1892 

1893 

1894 

1895 

1896 

1897 

1898 

1899 

1900 

1 901 

1902 

1903 

1904 

1905 

1906 

1907 

Average of the 20 years, 1 
to 1907 



Marks. 

8. 104, 669 
12, 900, 244 
20. 740. 773 
18,665, 816 
11, 989, 872 
17.584.397 
11, 404. 427 

9,919.434 
17,409. 232 
19.396.832 
22, 277, 946 
31.711,379 
33.965.457 
25.946, 284 
i9.99i.3oo 
25.381,035 
26,459.555 
25.406,367 
40, 262, 908 
52,313.652 



Marks. 
4. 200, 000 
4, 200, 000 
4, 200, 000 
4, 200, 000 

4, 200, 000 
4, 200, 000 
4, 200, 000 
4. 200, 000 
4, 200, 000 
4, 200, 000 
4, 200, 000 
4, 200, 000 
4, 200, 000 
5, 250,000 

5. 250, 000 
5, 250, 000 
5, 250, 000 
6, 300, 000 
6. 300, 000 
6, 300, 000 



22,591, 579 



4, 725, 000 



Marks. 

390,467 

870, 024 

1.654.077 

1, 446, 582 

778,987 

1,338,440 

720,443 

57L943 

1, 320, 923 

1,519.683 

1.807, 795 

2. 751.138 

2.976,546 

2, 069, 628 

1. 474, 130 

2, 013, 104 

2, 120, 956 

1, 910, 637 

3.396, 291 

4,601,365 



i, 786.658 



Ill 

Excerpts from the Proceedings of the Third 

German Bankers' Convention, held in 

Hamburg in September, 1907 



123 



EXCERPTS FROM THE PROCEEDINGS OF THE 
THIRD GERMAN BANKERS' CONVENTION, 
HELD IN HAMBURG IN SEPTEMBER, 1907. 

THE DISCUSSION OF DEPOSIT BANKING. 

The President. Gentlemen, before I give the principal 
speaker the floor, I wish to inform the assembly of some- 
thing which will perhaps interest them, namely, that the 
Reichsgenossenschaftsbank at Darmstadt has kindly noti- 
fied me that the agricultural cooperative institutions have 
adopted resolutions concerning the question of check 
legislation which are similar in content and in tendency 
to our own, so that the Director of the Reichsgenossen- 
schaftsbank felt justified in making the following addi- 
tion to his communication: "In this important question 
of check business and check legislation, which will be 
next dealt with by the Reichstag, commerce, industry, 
and agriculture go hand in hand." 

Privatdozent Doctor Jaffe;. Gentlemen, I fear that 
many of you shook your heads disapprovingly when you 
learned from the programme of the Third German Bank- 
ers' Convention that a theorist was to be the first to 
address you concerning the legal regulation of deposits. 
Now, gentlemen, even I was not able to refrain from this 
same head shaking when the flattering request of your 
committee came to me to undertake this report, for I 
am of the opinion that in the things of economic life the 
theorist has far more to learn from the practical man 

125 



National Monetary Commission 

than vice versa. I have complied with this request, and 
indeed gladly, for these two reasons, to which even you 
will perhaps allow some slight weight. In the first place, 
the question which we would deal with to-day has been 
opened for public discussion, not by practical men, but — 
at least for the greater part — by scholars, and therefore 
it is perhaps not inopportune if science takes a position 
with regard to it. In the second place, however, I can 
not regard myself, at least in this presence, as a pure 
theorist, for I have, during fifteen years of mercantile 
activity, acquired some sympathy with practical affairs. 

This activity has brought me into especially close rela- 
tions with English business life, and particularly with 
English banking, and since the latter is represented to us 
more and more as worthy of emulation and imitation, 
especially in the line of deposit business, I should now 
like to deal in somewhat more detail with the advantages 
and disadvantages of this system. 

First of all, I should like to make a few brief introduc- 
tory remarks concerning the general principles of deposit 
banking. 

The task of modern banking is a threefold one. 

First, the creation of a safe and convenient means of 
circulation and credit transfer as the necessary comple- 
ment of the money and coinage system established by 
the State. This is effected through the issue of bank 
notes, through the check and deposit system, and through 
other means of facilitating payments. 

With this part of banking activity the German Bank- 
ers' Convention has already concerned itself in its discus- 



126 



Renewal of Reichsb ank Charter 

sion of the "ways and means for economizing metallic 
currency" and the "renewal of the Reichsbank privi- 
lege." The other two functions of banking, which are 
much more important, and which together form the 
basis of the general system of credit organization, consist 
of what I might call credit concentration on the one side 
and credit distribution on the other. By credit concen- 
tration I mean the gathering of all the capital not in use 
at a given moment, from the greatest to the smallest 
portions, into a common reservoir; by credit distribution 
I mean the loaning out again of the capital thus collected 
to the men engaged in agriculture, commerce, and 
manufactures. 

From this double function there results the enormous 
importance of banking for modern economic life. The 
German nation particularly is compelled, because of its 
growing population and the relatively unproductive soil 
of its country, to develop industry, trade, and commerce, 
as well as agriculture, in the most intensive manner, and 
it is therefore more vitally interested than almost any 
other nation in making the fullest use of all available 
capital. This can be done, however, only if the avail- 
able capital is made accessible to the business man 
through concentration in the banks and if the banks 
meet with no difficulties in the collection and distribution 
of this capital. 

The banks obtain the moneys necessary for their busi- 
ness in three different ways: 

First, from their own capital; that is, in the case of 
the great joint-stock banks, which are to-day of chief 



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National Monetary Commission 

importance, through the sale of their own shares and the 
accumulation of undivided profits in the form of surplus. 

Second, through transacting the money affairs of busi- 
ness men and the bigger capitalists (deposits on current 
account) . 

Third, through the attraction of the cash and the sav- 
ings of the great public which are seeking investment 
(deposit business in the narrower sense) . 

The first of these sources is limited in its extent by 
quite definite bounds, which are fixed by banking policy 
and which can not be overstepped (the level of the divi- 
dends and the fluctuations in surrounding conditions). 
With increasing demand for capital on the part of busi- 
ness men, the capital of the banks is capable of increasing 
only very slowly. The result is that, with the progressive 
development of banking, the ratio of the banks' own cap- 
ital to the capital coming from the other two sources 
always falls. In England the paid-in capital of the 
banks amounts to-day, on an average, to about 10 per 
cent of outside money; with us, in Germany, the total of 
outside money was, even in the year 1892, not greater 
than that of the capital of the banks. To-day the ratio is 
about as two to one — that is, the outside money amounts 
to about double the bank capital itself, and, to be exact, 
perhaps a little bit more. 

How to attract these outside moneys is, accordingly, 
a problem of continually increasing importance, for this 
is essential in order that the daily increasing needs of 
business may be satisfied. England affords us the 
picture of an almost perfect concentration of all avail- 



128 



Renewal of Reichsb ank Charter 

able money in the vaults of the banks. In England the 
ideal is as good as attained, since not even the smallest 
particle of capital lies unused, but is drawn to the great 
reservoir of the London money market. It is one of the 
chief factors of the economic greatness of England that 
in London the necessary capital for every good business 
is always to be had cheap. This has been attained by 
the development of the check and clearing-house system on 
the one hand, and on the other, above all, by the assiduous 
nursing of the deposit business, by the extension of bank- 
ing facilities over the whole country, and by the erection 
of branches, deposit offices, and agencies, which are spread 
over the whole land like a close-meshed net. Just as in 
the large and medium sized cities, so in the small towns 
and villages, everyone is afforded an opportunity to enjoy 
the advantages of a bank connection. The number of 
bank offices in Great Britain amounts to-day to far more 
than eleven thousand, and is increasing rapidly. A single 
bank controls more than five hundred such offices. The 
outside money (savings and current-account deposits) 
deposited with the banks amounts to between eighteen 
and nineteen billion marks. Every little property 
holder, every official, every shopkeeper and artisan — 
and, indeed, even a great number of the more well-to-do 
mechanics and farmers — are as much the customers of 
the bank as are the manufacturers and the capitalists. 
It is also the case that very many women have accounts 
with the banks, from which, among other things, the 
household expenses are settled. The public corporations, 
too, set a good example for others to follow. The State, 

83703—10 9 129 



National Monetary Commission 

the county, the big corporations — these all deposit their 
money with the Bank of England or with one of the big 
banks, and all of their payments are transacted through 
these accounts. 

We in Germany are still very much behind this stage of 
development — partly as a result of the bureaucratic spirit 
of our public administrative bodies, partly as a result of 
the lack of acquaintance with business and the world on 
the part of the middle and lower strata in city and country, 
but in no small measure because our banks and bankers 
have not always given the proper attention to means of 
attracting the smaller deposits. The outside money of 
our banks amounted at the end of 1906 to 6,305,000,000 
marks, of which 2,141,000,000 marks were deposits and 
4,164,000,000 marks were other credits. 

The great difficulty of the extension of the check and 
transfer system is due in no small measure to the inade- 
quate development of our deposit system. To be sure, 
an ever-increasing number of deposit accounts have been 
opened in the great cities in the last decade, and in recent 
times the competition among the leading institutions has 
led to the opening of similar accounts in many of our 
secondary cities. But the small towns and the open 
country are, for the most part, still outside the circle of 
operations of the banks, and even in the cities the smaller 
business men and shopkeepers, the officials and people 
of private means, have not yet been attracted in large 
numbers. 

If our banks desire to fulfill properly their great eco- 
nomic functions, then further development must begin 



130 



Renewal of R etc hs b an k Charter 

here. The opportunities that offer themselves, if a shrewd 
and far-seeing policy is maintained, are indeed enormous. 
The field has, to be sure, already been occupied to some 
extent by institutions of other kinds — by the savings banks 
and by the Reichsgenossenschaftsbank — but it is large 
enough to afford room for all. 

In what way this extension of deposit business should 
proceed, the practical man alone can decide. Either the 
net can be extended on the English plan so that in every 
important center a deposit bank is instituted, upon which 
a more or less large number of agencies, and of bank 
offices opened only on market days, are dependent; or 
else an effort can be made to enter into closer relations 
with the local institutions already existing. 

A reorganization of deposit banking naturally can not 
proceed without great difficulties. These will lie chiefly in 
the increasing cost of the business and in the necessity 
for a central supervision of the branches and agencies. 

I may, however, express the conviction that our banks, 
which have mastered quite different difficulties, would 
solve even this problem in at least as satisfactory a way 
as the English joint stock banks have done. 

That the extension of the network of branches would 
finally pay appears to me to follow from this, that the 
English banks do not engage in a branch of business which 
would greatly add to the profits of the German deposit 
banks — the sale of investment paper to customers. 

The forward movement of our economic life in recent 
decades has been twice interrupted by temporary regres- 
sions, once at the beginning of the nineties, and again at 



131 



National Monetary Commission 

the beginning of the new century. These, regressions have 
naturally caused the banking system to suffer sympa- 
thetically. Our German credit banking system as a whole, 
however, has stood the test both times excellently well; 
in each case better than the corresponding French and 
English institutions in similar situations. Nevertheless, 
on both occasions loud demands arose for legislative inter- 
ference for the removal of real or apparent evils. 

The agitation of the nineties gave us the deposit law 
and the bourse law; that of the recent period of depres- 
sion seems now to be restricted to a demand for a deposit 
law. 

In order to be able to judge rightly concerning the value 
or worthlessness of these efforts we shall endeavor .to 
make clear what are the underlying motives of this de- 
mand. We can easily distinguish two tendencies, both of 
which make toward this goal, but from very different mo- 
tives and causes. 

I would designate the first as the political. It arises 
from the circles which have written on their banners the 
protection of the so-called ''middle class in city and 
country." It proceeds from members of the parties 
forming the right and a considerable part of the center, 
and above all from the union of farmers and the other 
representatives of agricultural interests — from those, 
therefore, who look askance at the development of 
Germany into an industrial state. 

Being declared opponents of mobile capital, they lack, 
for the most part, the understanding of the great economic 
significance of banks and bourses, which appear to them 



132 



Renewal of Reichsb ank Charter 

not as important factors of economic development, but 
as morbid and dangerous excrescences, whose efficiency 
must be restricted in eyery way. 

In spite of the fact that the bourse law, which is now 
recognized even by its framers as a complete failure, has 
injured German economic life very deeply, not only are 
all conceivable hindrances placed in the way of improving 
it, but new means are sought of hindering the progress of 
our industrial life ; and for this purpose the legal regulation 
of deposit banking is proposed. 

It is very well known in those circles that the develop- 
ment of our industries is very closely connected with that 
of banking, that the enormous development of the former 
was possible only through the vigorous support of the 
banks, which drew the means for this, for the most part, 
from their deposit business. Under the pretense that the 
association of regular banking business with commercial 
activity, and the issue of notes which is characteristic of 
our German banking system, endangers the safety of 
deposits, it is proposed that the deposit business be sub- 
jected to legal limitations, which would correspond 
approximately to those applied to note issue. These 
proposals have recently been clothed in the formula 
' ' legal regulation of the covering of the deposits of the 
Reichsbank and of all other banks in accordance with 
the increased importance of the transfer and deposit 
business since 1875." 

The intention is to prevent the banks which do a note 
issue business from accepting deposits, apparently in the 
secret hope of guiding these sums to their own mills, and 



133 



National Monetary C ommis s io 



n 



of thus finally fulfilling to some extent the oft-repeated 
demand for cheaper money for agriculture and handicrafts. 

The second tendency that makes for a legal regulation 
of deposit banking I would call the scientific. Its chief 
advocate is the well-known economist, Prof. Adolph 
Wagner, of Berlin, whom a number of other experts and 
also some practical men have joined. Their opinion is 
based upon the conviction that the system of joining 
regular banking business with the so-called irregular 
(promotion, flotation, and stock-brokering business) is full 
of the greatest dangers for the solidity of our banking 
system. They advocate, on the contrary, the English 
system of division of labor, under which the large joint 
stock deposit banks, it is alleged, carry on only the 
regular banking business, while the promotion and flota- 
tion business lies in the hands of private individuals and 
financial companies, which use no outside money in their 
business, and therefore are not included in England 
among the banks. 

The followers of this line of thought aim at making the 
attraction of money from outside — at least of savings 
accounts — difficult or impossible for the joint-stock 
banks and banks of issue. On the other hand, they 
advocate the erection of pure deposit banks which would 
be limited to the regular banking business in the invest- 
ment of their funds, and forced to maintain a legally fixed 
reserve against the deposits, and to publish regular state- 
ments concerning their investments and cash on hand. 

In details the propositions are in marked disagreement ; 
some advocate the erection of an imperial deposit bank as 



134 



Renewal of Reichsb ank Charter 

a sister institution to the Reichsbank ; others demand the 
chartering of one or more joint-stock deposit banks estab- 
lished by private means, but subject to state supervision; 
others advocate deposit banks established by the separate 
states. Finally, there are some demands for a less radical 
change — namely, that the regular publication of accounts 
be required of the existing mixed banks, while at the 
same time certain advantages shall be given to the pure 
deposit banks. 

The time at my disposal does not permit me to present 
to you the different proposals in detail. You will find 
everything more explicitly dealt with in the excellent 
book by the president of theCentralverband, Geh. Justizrat 
Dr. Riesser, "Zur Entwickelungsgeschichte der deutschen 
Grossbanken," in which the particular points are sub- 
jected to a keen criticism, which, in my judgment, is 
i ncontr over tible . 

Quite recently it has been suggested that all banks be 
forced to keep against their deposits a cash reserve of 
about two per cent with the Reichsbank. The third 
speaker will deal with this proposition in detail. 

I shall confine myself to a general criticism, more es- 
pecially because, in my judgment, the entire proof of the 
advocates of these measures is built upon two wholly 
erroneous assumptions, which I shall now endeavor to 
correct. 

In the first place it is no longer true that the English 
joint-stock banks are pure deposit banks, or that they 
carry on only so-called regular banking business. To be 
sure, the present joint-stock banks have no direct share in 



135 



National Monetary Commission 

flotations, promotions, and similar business. But indi- 
rectly, through the mediation of the bourse, most of them 
place an increasing part of their available capital at the 
disposal of speculation, and thus of promotion and flotation 
business. The more strongly the movement toward con- 
centration in English banking proceeds, and the more also 
the administration of the provincial banks is transferred 
to London, the closer will be the connection of the banks 
with the bourse and the greater will be the sums regularly 
loaned there. I have treated this more in detail in my 
book, " Das Englische Bankwesen," but even a very short 
consideration of the subject must make it clear to us that 
it can not be otherwise, according to the nature of things. 

We know that the available resources of the English 
people are almost wholly concentrated in the banks. If 
there is only one such reservoir at hand, then the sums 
which are necessary for flotation and stock business flow 
from this reservoir. No one who knows the English stock 
exchange will dare to assert that the business of specula- 
tion is carried on solely through the help of the profes- 
sional speculators, the comparatively few and not very 
powerful financial companies, and the great capitalists and 
private bankers, like Rothschild. These afford only a 
relatively small share of the necessary capital. 

The absorbing capacity of the English stock exchange 
rests on the institution of jobbers or dealers — that is, the 
big stock dealers — who buy and sell on their own account 
any desired amount of the securities especially handled 
by them. They can only do this if behind them stand big 
money-lenders, who are ready at any time to take the 



136 



Renewal of Reichsb ank Charter 

securities in question as collateral, and these money- 
lenders are none other than the big English joint-stock 
banks, which daily put their surplus money at the disposal 
of the bill and stock brokers connected with them. The 
big items which appear in the balances of these bankers 
under " money at call and short notice " are just such sums. 

The result of the division of labor is therefore simply 
that the English banks furnish the money for the notation 
and stock business without thereby securing the slightest 
control for themselves over the business of speculation. 
Up to this time the English deposit banks have not suf- 
fered much from this, but it is well known that English 
speculation is in a very bad way because no influence is 
exerted upon it by the banks. Nowhere are so many 
extravagant speculations launched as on the London 
Stock Exchange; nowhere — not even in Germany — has 
the public lost such enormous sums, and nowhere does the 
constant enactment of more and more stringent bourse 
laws help so little. 

That is the first fallacy. The second is that the union 
of speculative with regular banking business in Germany 
has led, or must lead, to a jeopardizing of the banking 
business. I am inclined to think that exactly the oppo- 
site is the case. 

In the first place, an analysis of the balances of our lead- 
ing institutions shows — and this is of chief importance — 
that the covering of outside money by immediately avail- 
able assets is throughout satisfactory; as regards the 
amount of available cash reserve, we make a much better 
showing than most English deposit banks, especially since, 



137 



National Monetary C ommis s i o 



n 



as above mentioned, the reserves of these banks consist in 
part of advances to the bill brokers and stock jobbers, 
which, in case of a collapse of the stock exchange, are not 
realizable, while the other part is deposited with the Bank 
of England, which uses these sums again, however, in its 
own business. On the other hand, with us in Germany, 
especially in times like the present, the holdings of stocks 
of many of our large banks may be felt as a heavy weight ; 
but, in my opinion, they signify no danger whatever for 
deposit creditors. 

In the second place, scientific investigation of the 
development of our banking system in the last decades 
has shown that the greatest guaranty of a sound condition 
of our credit system lies precisely in the union of the flota- 
tion banking with the regular banking business. 

Institutions which carry on promotive business solely — 
we have a few such in Germany — are interested solely in 
effecting the quickest possible sale of the securities they 
handle to the public. With the sale of the securities, all 
connection between the promoter and the concern pro- 
moted ceases. 

In our large banks, on the contrary, the flotation busi- 
ness is only one link in the chain of various relations 
between the bank and the customers connected with it. 
The starting or enlargement of an undertaking stands 
always in the closest connection with relations that 
extend over years through the current-account business. 
The bank is, therefore, on the ground of longer connec- 
tions, in the best position to judge whether an undertaking 
is ripe for promotion or not. Our great banks, too, as a 



138 



Renewal of Reichsb ank Charter 

result of their varied connections with all branches of 
industry, are much better informed concerning the factors 
involved than mere promotion companies can be. The 
banks can gauge the condition of the world market much 
more accurately than can any such institutions. They 
are, by their whole position, so closely bound up with the 
well-being of the people that their self-interest and even 
their instinct of self-preservation forces them to carry on 
this promotion and notation business as carefully as 
possible. They have, therefore, the greatest interest not 
only in the success of the notation, but also in the perma- 
nent prosperity of the undertaking, which remains its 
customer. Not only regard for their reputation as to 
notations, but in a much higher degree their desire to 
enter into permanent connection with the enterprises 
they launch, affords a guaranty of the solidity of promo- 
tion business carried on by our banks. 

Our banks have been the pioneers of industrial develop- 
ment — a development which in speed and magnitude has 
been equaled only in the United States. If this enormous 
expansion of our economic strength and of our wealth has 
occurred with much smaller disturbances than in any other 
country (England certainly not excepted), then for this 
our thanks are due chiefly to our system of mixed banks 
and to the proper use of this system. 

The organization of our banking system arose histori- 
cally from force of circumstances, as clearly as did the 
opposite system in England. Both have their national 
justification, and both, of course, involve certain dangers. 
But the German system is not only the proper one for our 



139 



National Monetary Commission 

conditions, but it is also in itself the more successful and, 
so far as we can judge, the safer. 

Xo great economic organization attains an absolute 
ideal through legal provisions. Abuses and disappoint- 
ments are always possible. The safest system is, however, 
that in which the legitimate self-interest of the parties 
concerned coincides with the true interest of the com- 
munity, and this is better attained by our system than 
by the English. 

We ought, therefore, to refrain from depriving this 
system of its foundations by rendering it more difficult 
for bankers to attract deposits. We ought to guard our- 
selves especially against seeking to import into Germany 
through legal compulsion conditions that have arisen in 
England through natural development and without legis- 
lative interference. The only country which has at- 
tempted to subject its deposit banks to that kind of legis- 
lative prescription, namely the United States of America, 
has had very unsatisfactory experience as its result. 

Obstacles placed in the way of the deposit business 
would check and restrict the development of our banking 
system without giving us anything better in its stead. 
We must, therefore, combat such interference most 
energetically. 

But the more vehemently you object to attacks of this 
kind, the more necessary it is to examine, in the most 
critical manner, the proposals made by the other side, 
and, for your own part, to devise the requisite — the neces- 
sary — measures for the maintenance and development of 
deposit banking. 



140 



Renewal of Reichsb ank Charter 

The chief question is whether a separation of deposit 
and current-account creditors on the books of the bank is 
desirable and possible, and whether the publishing of 
monthly statements demanded by so many — as is done in 
England by the joint stock banks, and also by the great 
private bankers, without legal compulsion — is to be 
recommended for us also. Further, whether the funds of 
the deposit department are to be managed separately; 
whether those obligations are to be covered and guaran- 
teed in other ways than are the other obligations of the 
bank; and, finally, what course is to be advocated in the 
interest of a further development of deposit banking. 

These points and their bearings can be estimated 
rightly in detail only by practical men, and I will there- 
fore leave them to be handled by the other gentlemen to 
whom the subject has been referred and in the general 
discussion. 

For my part, however, I will permit myself to warn 
you against the repetition of a cardinal mistake which 
has been made by those who were interested in the fram- 
ing of the bourse law — namely, that of underestimating 
the strength of the opponent. You were reminded again 
yesterday how comparatively easy it is to bring about 
legislative interference of the most peremptory kind, and 
how difficult it is later to secure even a moderation of 
measures of that nature. 

Therefore the saying "principiis obsta" applies here — 
resist the first attempt. 

How this may best be done is no question for science, 
but for politics. It is not my place to give you advice 



141 



National Monetary Commission 

here, but if you will permit me to express my private 
opinion, then I should like to point out that the German 
merchant class has itself to blame if it does not occupy 
the position in the political and economic life of the 
nation to which its achievements and its importance 
entitle it. 

The German merchant has allowed his business to make 
such heavy demands upon him that he has almost 
renounced all share in the political life of the country. 
So long as no change occurs in this state of affairs, he 
need not be surprised if he does not receive the necessary 
consideration on the part of the Government and the 
political parties. From the parties there is not much to 
be hoped for in the present political situation. This is 
far from being the case, however, with the factor which 
is, after all, the determining one in matters of legisla- 
tion — that is, the Government. 

The Government is supposed, of course, to look impar- 
tially upon conflicting interests, and it makes the effort 
to be just to all parties. But it would be only human for 
it to let itself be driven by the skillful and effective agi- 
tation of the agricultural classes and the middle class to 
actions which run contrary to the interests of other 
classes — at least if the latter allow this to happen without 
a remonstrance. 

What is necessary is, that these interests, above all the 
merchant class, should strengthen the backbone of the 
administration against the oft-repeated demand to bind 
our economic life in restricting chains. The administra- 
tion will be grateful for such support, and the fruits will 



142 



Renewal of Reichsb ank Charter 

not be long in coming. Should this assumption, however, 
be an erroneous one, which I do not believe, then there 
is always time yet to resort to those means which are 
used by the opposition party on all occasions, and to 
which Goethe's line applies — "Und bist du nicht willig, 
so brauch' Ich Gewalt." For instance, in case of the 
introduction of a deposit law, the idea could be hit upon 
of recommending a bankers' strike when a new loan to 
Prussia or to the Empire is being arranged. I believe 
that, especially in the present state of our loan market, 
the chance of attracting "volunteer laborers" would not 
be a very large one. But apart from weapons of this 
sort — which I have of course mentioned only in jest — 
there are plenty of other means by which further legis- 
lation injurious to the community may be prevented, if 
only it were decided to make use of them. I should be 
the last to recommend the attainment of special privi- 
leges through the use of pressure. But it is not a question 
of special privileges, either for the German merchant class 
in general or for the banking and exchange business in 
particular, but simply a question of seeing them guaran- 
teed the right to keep, without disobedience to law, 
their rightful "share of the sunlight." 

Trade and manufactures, as well as agriculture, have 
the right to demand that they be estimated and treated 
in accordance with their significance and their capacity 
for rendering service, even that of bearing taxation. 

The German merchant wishes to be treated in accord- 
ance with the motto of the Prussian royal house — Suum 
cuique; to each his own, not more and not less! [Loud 
applause.] 

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National Monetary Commission 

The President. I also thank the speaker for his espe- 
cially clear and instructive remarks. As the masterly 
book on English banking which he has written can not be 
overlooked if this matter is to be studied, so no one can 
pass over his present remarks. At only one point do I 
disagree. If he intimated — only incidentally, indeed, and 
without himself countenancing the plan — that there may be 
even a possibility of bankers refusing their help in certain 
national contingencies, especially in the notation of con- 
sols, in order to repay "force with force," after the model 
of labor strikes, then I say that this is a way which the 
German banking class never could and never will follow. 
If he has further intimated that we should busy ourselves 
with making an outcry, I reply that we are convinced 
that very many others are and always will be superior to 
us in the art of bawling, and that we have therefore 
decided to work through nothing but the inherent strength 
of our own arguments. This course, however, will and 
must lead us to victory, even if only in the future, and 
after many vain struggles. Of this I am convinced. 

Doctor Damme. Gentlemen, the credit system of a 
country is an organic whole, closely associated with the 
economic needs and the customs of the people. One 
part fits into the other, like the wheels of a machine, and 
the task of maintaining the machine in the best possible 
working order falls to the bankers. In the banks money 
redundancy and money need balance each other. Over 
against the money-gathering activity, the so-called lia- 
bility business, stands the money-distributing activity, 
the asset business proceeds in parallel lines, and it is a fun- 



144 



Renewal of Reichsb ank Cha?~ter 

damental law of science that the nature of the liability 
business must determine the undertakings involved in 
the asset business. If the management of but one of the 
customary branches of the liability business receives a 
check — whether on its own initiative or through legal 
enforcement — then the results make themselves felt un- 
avoidably on the asset businesses. If the State interferes, 
for instance, in the legal regulation of banking deposits, 
then that signifies nothing less than a revolution of the 
whole credit system under which Germany has advanced 
in recent decades to its present economic position — to the 
position which has given the established masters of the 
seas, the English, serious apprehensions. These appre- 
hensions, as we all know, are not well founded, for the 
world's trade opens up every year new and unsuspected 
routes, on which the flags of all nations may meet each 
other peaceably, and the commercial peoples of the world 
may enter into competition for the best satisfaction of 
old and new needs. The fact that Germany has become 
so considerable a factor in this rivalry is to be attributed, 
not only to the political strength of the Empire, but also 
to the enterprise of our merchant class, which has been 
able to rely upon the elasticity of our credit system. 
Now, among the lessons which are always impressed 
afresh upon every generation of business men is the fact 
that credit is a tender plant, that it can indeed be planted 
and nurtured in favorable soils, but that for its develop- 
ment to a strong-rooted tree the lapse of time is necessary. 
"Credit can not be built according to plan, like a house," 
says Bagehot in his well-known book, "Lombard Street," 

83703— 10 10 145 



National Monetary Commission 

and the warning which he, a severe critic of the English 
single reserve system, gives is pertinent also for us. 
''Whoever lives under a great and well-grounded credit 
system must consider that if he destroys it he will not 
immediately have another fully developed one. For it 
requires years before the new system can attain the 
strength of the old." These words may be taken to heart 
by those who regard the banking business as a proper 
object for their legislative ambition — and, also another 
saying of Bagehot's, a man who won distinction both as a 
theorist and as a practical man of affairs - " The best thing 
a government can do with the money market is to leave 
it to itself." 

If England is pronounced on many sides to be the land 
of the ideally organized banking system, then, on the one 
hand, this praise must be considered as very extravagant 
in view of the criticisms made by the English themselves ; 
and, on the other hand, we should not forget that the 
system existing in England to-day has behind it a century 
of development and of the most far-reaching division of 
labor in banking. It has all developed as an organic 
whole, and legislation has been intelligently adjusted to 
fit existing conditions. If we should seek to-day to 
appropriate for ourselves the final result of such develop- 
ment in a foreign country, we might destroy our own vital 
germs of strength without providing an equivalent sub- 
stitute. Obviously Germany is not yet sufficiently sup- 
plied with capital to refer all those who desire to trust 
their money to the banks to the small interest payments 
of a pure deposit bank; and to enable commercial banks, 



146 



Renewal of Reichsb ank Charter 

which understand how to use great capital permanently, 
to attract the easily obtainable medium from depositors. 
All parties would be injured by restrictions. The depos- 
itor cannot live on low interest ; the banker and the share- 
holder in the joint-stock bank see the income of their 
undertakings growing less and much highly promising 
work remaining undone. 

Economically, however, it is in any case right that 
unemployed capital be brought, so far as possible, to the 
places where it will perform the greatest services. Where, 
however, could it work in any greater degree directly for 
the good of the whole than in the credit banks, which are 
constantly redistributing it to money consumers in com- 
merce, agriculture, and industry? Disregarding, perhaps, 
the smallest amounts, which merely contribute to the 
formation of capital in the form of savings, the available 
money, otherwise condemned to unfruitful idleness, 
becomes part of the great stream of money which is con- 
ducted over the whole sphere of business activity, vivifying 
and fructifying it. Now, it will be said that the great 
money stream is the very danger we must guard against; 
that it is never known when and how it will overflow, and 
that therefore it is better to guide it into different channels, 
even from the source; or, in other words, to differentiate 
more strongly the business of the banks. This argument 
has something plausible about it, and is quite unanswer- 
able for a country which is thoroughly saturated with 
capital. Our natural development will lead us gradually 
to follow the road indicated without external compulsion. 
There is already a tendency in that direction. Even now, 



147 



National Monetary Commission 

according to the mortgage bank law of 1899, no more 
new banks can arise which carry on credit business of all 
kinds and at the same time issue mortgage debentures. 
The mortgage business has become a legally regulated 
specialty. Thus banks have already arisen which accord- 
ing to the English usage would not be designated at all by 
this name, but would belong in the class of the various 
"companies," as the Bank for Mining and Industry, the 
Bank for German Railroad Securities, the Central Bank 
for Railroad Securities, the German Bank for Coloniza- 
tion, the Land Bank, and many others. They all follow 
specialties. The process of differentiation is thus already 
in existence, and is undoubtedly progressing. When the 
creation of capital in Germany shall have reached a higher 
stage, the justified desire, which is still predominant, to 
increase capital rapidly by means of high interest rates 
will gradually be replaced by the anxiety to obtain the 
greatest possible security for what has already been 
accumulated, even if at a sacrifice as regards the rate of 
interest. Then the first-class investments with a fixed 
rate of interest will rise permanently in general favor, and 
it may be expected with confidence that then, out of the 
growing need, groping cautiously at first, a pure deposit 
bank will here and there detach itself from the general 
business of a credit bank or of a large private bank, with 
a prospect of success. 

Science is pretty well agreed as to the character that 
the business of such a pure deposit bank should have; 
in practice there are still many hard nuts to crack. In 
any scientific work on deposit banks we can read that 



148 



Renewal of Reichsb ank Charter 

good bills are among the best investments which a deposit 
bank can make; value is attached in particular to the 
certainty with which payment of the liabilities can be 
counted on at fixed dates. In practice it is known, 
however, that in most places one of the most difficult 
tasks is to bring together in a big portfolio nothing but 
first-class bills. The city of Hamburg, to be sure, has 
no difficulty in this respect, as we heard yesterday from 
authoritative sources. In practice it is also known that 
many bills that are of perfectly legitimate origin and are 
indorsed with good signatures must be renewed when 
they fall due, because the business back of them can not 
be wound up in three months, and that these bills must 
encroach anew upon the money market, even if not on 
the accounts of the temporary bill holders. Who would 
not, a short time before the collapse of the Leipziger Bank, 
have considered bills which bore its indorsement among 
the best investment paper? The heavy loss, however, 
that arises from the discounting of all bills which were 
thought to be good but which are afterwards dishonored 
can more easily be borne by a bank which has many 
different irons in the fire than by an institution, which has 
no possibility of substantial compensation through other 
profitable business. The business of loans on collateral is 
therefore recommended to the deposit banks, subject to 
the proviso that a very low limit for loans be maintained. 
Prof. Otto Warschauer would establish for the Imperial 
Deposit Bank proposed by him the maximum limit for 
loans on first-class stocks at 30 per cent of their market 
value. This proposition will be approved by the other 



149 



National Monetary Commission 

banks, because in that way the Imperial Deposit Bank 
would not enter into serious competition with them in 
collateral-loan business. With a loan to 30 per cent of the 
value of the security, very few customers could be served, 
for even the Reichsbank itself would go far above that 
limit for first-class securities. A business of that kind, how- 
ever, leaves nothing to be desired as to the safety for the 
deposit banks, if only some one could be found to go into it. 
Among the absolutely safe businesses which deposit 
banks are recommended to undertake, scientific authorities 
almost unanimously include the purchase of state securities 
and others designated as available for trust funds; further, 
commission business, and even flotation and syndicate 
business in public funds. Since these proposals were 
made new experiences have been gone through, which 
ought to lead to other results. Commission business may 
pass in any case, although it is well known that resourceful 
people have used this form of the exchange law for specu- 
lation, and have later tried to claim the protection of sec- 
tion 764 of the Civil Code, the patron saint for dishonest 
commission givers. The purchase of state paper has been 
unfortunately for years a losing business — interrupted 
only by the brief sunshine caused by the 4 per cent 
bills — and in this hall hundreds are present who, as par- 
ticipators in the last 3^ per cent imperial loan and Prus- 
sian consols, lost at least 7 per cent in the final settlement 
of the loan. Such losses would have struck a pure deposit 
bank especially heavily, not only through the reduction 
of the yearly income, but also because the trust in the 
absolute security of the deposit bank must be neces- 



150 



Renewal of Reichsb ank Charter 

sarily lessened. The history of English banking teaches 
also that pure deposit banks are not immune from collapse. 
To older business men the fall of the City of Glasgow 
Bank is still an unpleasant memory. It is therefore evi- 
dent how thoroughly the theoretically incontrovertible 
propositions must be tested by practice ; and, with all def- 
erence to abstract science, the fear can not be suppressed 
that if such an exclusively practical question as this about 
the character of the credit system is not settled chiefly 
according to the dictates of practical experience, the 
nation will have to lament the results very bitterly. 

The greatest importance is attached by all theorists 
to the most complete publicity of banks doing a deposit 
business. The demand that he to whom the greatest trust 
is given must prove on his part how he makes himself 
worthy of this trust seems entirely natural. Now joint- 
stock banks and the companies carrying on a banking busi- 
ness with limited liability are compelled to publish their 
balance-sheet every year; and if the law should compel 
them to publish monthly instead of yearly balance-sheets, 
that would mean an expensive inconvenience, but no 
change of principle for those banks. The value of pub- 
licity in this connection is enormously overstated. Thus, 
for instance, Neumann-Hoffer, in his book, " Deposit- 
engeschafte und Depositenbanken," says (p. 214): "It 
would be an excellent means of securing a rational con- 
duct of business" (he is speaking of "the full and un- 
qualified publicity of all bank operations "). Against 
this we can cite the fact, corroborated by much ex- 
perience, that there is only one really effective means of 



151 



National Monetary Commission 

attaining the rational administration of business — namely, 
the direction of business by sane, wise, and upright men. 
The author cited says further (p. 216), that the bank 
creditors would, with a similar form of statement for 
all banks, compare the balance-sheets with each other, 
and therefore draw conclusions regarding the solidity 
of their banks. That is more than we have a right to 
hope. The mercantile insight of our public is still far 
behind this point in its development. Not only the 
ordinary little man, not only the intelligent men and 
women of the higher social circles of the official and 
professional classes, but also the greater part of our 
business men lack the information necessary for an 
understanding of the banking business and of bankers' 
balance-sheets. 

This lack of understanding accounts for many a pas- 
sionate invective against our banks, and many a radical 
proposal based on generalizations from quite isolated 
instances of abuses. Theory and practice, written ex- 
position, and teaching by word of mouth must work 
together for a long time before the general public is 
educated up to an intelligent cooperation in economic 
life, in so far as it is concentrated in the banks. 

With the growing knowledge of the essential character 
of our banks and of their great national functions w^ould 
come a better understanding of how closely our bank 
organization is adapted to the needs of our population 
and its economic condition. Finally, we ought also to 
ask ourselves whether the results attained in commerce, 
industry, and agriculture in the last half century do not 



152 



Renewal of Reichsb ank Charter 

present significant proofs of the fitness of our institutions ? 
I think I am not making too bold an assertion when I 
say that a revolution of our banking system, especially 
deposit banking, would be felt at present as disadvan- 
tageous by all productive classes, and not least by those 
who for weighty reasons have sometimes not been found 
among the friends of the banking business — that is, by 
agriculture and industry. 

The customer can approach his bank in a twofold role — 
as creditor, in current account or deposit account, or as 
debtor in one of the many customary forms. In his role 
as creditor the farmer and business man is now accus- 
tomed to enjoy the high interest which the banks can 
afford to pay their customers as the result of the favorable 
use of the money managed by them in all sorts of economic 
undertakings. It is not a matter of indifference whether 
the capital temporarily disposable brings an interest of 
from one-half per cent to about 2 per cent, as in England, 
or whether it participates, to a certain degree, in the 
favorable opportunities of the money market. Industry 
and agriculture are even more interested, however, in 
rinding in the banks ever-obliging money lenders, who 
are always on hand for undertakings which are eco- 
nomically desirable and which promise to be successful. 

A change in deposit banking would naturally consider- 
ably decrease the stock of foreign capital in the credit 
banks, and the necessary consequence would be that 
their investment business would also be reduced and 
burdened with heavy conditions. The cheap credit which 
is customary among us in normal times would at first 



153 



National Monetary Commission 

not be maintained, though in time this condition might 
be restored, and no one, I imagine, will have the courage 
to predict when economic life, disturbed by such measures, 
would begin to return to a condition of equilibrium. The 
injury inflicted in the meantime would be most heavily 
felt perhaps by those who are most inclined to rebel against 
present conditions. 

I sum up what I have said as follows: 

First. The German banking system is essentially suited 
to the present needs of our economic life as it has been to 
those of the past. Naturally, it falls short of perfection, 
just as do all other human institutions. But that is no 
excuse for legislative interference in the German bank 
organization. 

Second. The banker class labors continually for the 
perfecting of its organization, and does not fail to discuss 
questions affecting this organization, as indeed the present 
day teaches anew. The objection can not be made that 
external pressure was needed before there was any public 
discussion of the deposit system ; - for only since the foun- 
dation of the "Central Union" (" Centralverband ") have 
we been in a position to discuss freely questions of banking 
before an expert audience. But it is to be hoped that 
the whole nation will labor for the perfection of its eco- 
nomic insight, just as the banking class itself has done. 
We have the same ideal for the banking class and for the 
community — not tutelage, but independent judgment and 
initiative. [Applause.] 

Doctor Jaffe). Gentlemen, I should like to speak 
briefly in reply to the remarks which Herr Geheimrat 



154 



Renewal of Reichsb ank Charter 

Riesser has made concerning my address, in order that 
no misunderstanding may arise. Of course I did not 
think of recommending a strike, but, as I indeed expressly 
stated, I spoke of it only in a joke. If I remarked that 
the banker class, according to my private judgment, 
would do well to put its influence more heavily in the 
scale, I did not thereby mean that it should make an 
outcry — in that I agree with the honorable chairman; 
I meant simply this: Let them make up their minds as 
to what they want, and let them give expression to their 
wishes and say that they are backed by the whole banking 
class — in fact, the whole mercantile class. If they do this 
quietly but energetically, it will perhaps be even more 
effective than a great deal of noise from other quarters. 

Geheimer Oberfmanzrat MuELLER, director of the 
Dresden Bank. Gentlemen, the committee was in doubt 
whether it was fitting, while we are in the present stage of 
foggy suggestions of legislative action with regard to 
deposits, to burden the Bankers' Convention with this 
question. We decided to do so because we wished not 
to expose the banking profession a second time to the 
reproach that was made against it after the promulgation 
of the unsuccessful bourse law — that it had been deficient 
in prompt and energetic opposition. 

The result of the bourse law may be designated as an 
effective paralysis of an arm of our economic body. 
Whether the course recognized by our legislators as neces- 
sary will be followed — that of repairing the injury and of 
giving back to a paralyzed arm the necessary mobility and 
elasticity — the future will show. The experiment which 



i55 



National Monetary Commission 

is recommended for the banking system by surgeons un- 
skilled in this sphere is an operation on the bowels of the 
body politic; if thereby the inner organs are injured the 
injury will be incurable. The contemplated step should 
at least proceed on the basis of a clear conception of the 
position and function of these inner organs. Instead 
of this, I see even in the preliminary list the question, 
"What is the economic nature of the deposits managed 
by banks and bankers? From what sources do they 
flow?" — a question involving a fundamental error on the 
part of the politicians and scholars who feel called upon 
to solve the problem they have themselves constructed. 
They desire to protect the savings of the smaller depositors 
and those unfamiliar with business against irrational use 
and resultant danger, and assume that the deposits 
figuring in the balance sheets of the banks and bankers 
are, for the most part, composed of savings. 

In opposition to this, I assert, on the ground of my 
practical and pretty comprehensive experience — and I 
believe that all the practical men in this assembly will 
bear me out — that the sums listed in the balance sheets 
as deposits are only in a very small part really savings. 
These deposits are collected chiefly from the business 
reserves of business men, who allow their other banking 
transactions also to be handled by their banks, and from 
the temporarily disposable capital of the larger capitalists, 
which is soon to be invested in securities, mortgages, etc. 
For the proof of this statement I must go somewhat 
further into the development of German savings banks. 



156 



Renewal of Reichsb ank Charter 

The deposits of the Prussian savings banks alone, which 
amounted in 1870 to only 495,000,000 marks, have 
increased, until by the end of 1905 they were not less 
than 8,293,000,000 marks; during the years 1901 to 1905 
the increase averaged 500,000,000 marks a year. The 
savings banks of the Kingdom of Saxony had in the year 
1905 deposits amounting to 1,331,000,000 marks; these 
were distributed among 2,753,000 depositors, so that there 
was a savings bank book to every 1.62 inhabitants. The 
deposits of all the German savings banks amounted to 
13,000,000,000 or 14,000,000,000 marks at the end of 1905. 

The savings banks invest their money chiefly in mort- 
gages. According to the statistics of the Prussian savings 
banks, which are available in complete form only for 1904, 
there were invested at the end of that year 7,761,000,000 
marks, as follows: 



In mortgages 

Securities (for most part not state, but communal paper) . 

In other ways (bills, bonds, deposits with the communes, 

etc.) _-. 



Marks . 
4, 703. 000, 000 
2, 188, 000, 000 

833, 000, 000 



Per cent. 



As a result of the high interest on mortgages the savings 
banks afford their depositors relatively high interest, 
which varies between 3 per cent and 4 per cent, rates with 
which the credit banks, at least the larger ones, cannot 
compete in times of normal money conditions. 

In addition to the savings banks the producing middle 
classes — especially the artisans, and more recently, the 
farmers — use the cooperative institutions (Genossen- 
schaften) , for interest-bearing investment of savings and 
of disposable working capital. According to the statistics 



157 



National Monetary Commission 

of the union of the Schultze-Delitzsch Genossenschaften, 
1,020 Genossenschaften belonging to this union had at 
the end of 1905, besides their own property (including 
surplus) of 256,000,000 marks, outside moneys coming 
from private individuals to the amount of 893,000,000 
marks, or three and a half times their own capital, which 
was generally used for credits to the members. The out- 
side moneys have doubled in these institutions since 1895. 

The statistics compiled by the Prussian Centralgenos- 
senschaftskasse comprised the returns from 13,912 associa- 
tions which were attached to it; at the end of 1905, 5,685 
of these associations, with a capital of only 54,000,000 
marks, had not less than 758,000,000 marks of deposits — 
that is, almost fourteen times their own capital. The 
assets of 811,000,000 marks balanced against the obliga- 
tions of these societies included 16,800,000 marks of 
securities and 29,600,000 marks of mortgages, and the 
remainder, 765,000,000 marks, was evidently invested in 
credits to the members, mostly loans on security. 

The total yearly increase of property in Germany is esti- 
mated, on the basis of the returns of the Prussian supple- 
mentary tax, to have averaged for the last few years about 
three and three-fourths billions of marks. But with refer- 
ence to this increase we must not forget that a considerable 
part of it results from the increase in value of land holdings 
and industrial investments, especially the real estate of the 
big cities, and that industry, including agriculture, has 
plainly not, as is well known, divided all of its surplus 
profits, but has used them for the extension and improve- 
ment of its plants. 



158 



Renewal of Reichsb ank Charter 

It is to be observed, further, that the flotations of securi- 
ties in Germany in the last decade require on the average 
about two or three billions of money yearly, and that of 
this there are about one and a half billions yearly of domes- 
tic securities paying a fixed interest — state and communal 
loans, mortgages, and bonds — which are reckoned in the 
investment of savings. 

From these figures it appears that there is such an ex- 
haustive absorption of yearly savings (though we set the 
highest possible figure for these savings) as to leave small 
chance for the credit banks to compete for savings deposits 
with the savings banks and cooperative associations. For 
the greater part of the population in the small cities and 
in the open country there exist no institutions at all for this 
purpose; the credit banks have until now not thought 
about it at all, and can not for a considerable time think 
about extending their network of branches so far, since 
the results would be entirely disproportionate to the 
expense of establishing and maintaining them. I shall 
discuss later the peculiar conditions in Mecklenburg and 
Oldenburg, where pure deposit banks find a field of activity. 
In general the deposit business of the banks is limited to a 
few large cities, and so far Berlin is really the only place 
in which a system of deposit banking has developed on a 
large scale. The deposit banks and the deposit depart- 
ments of the branch banks undertake the management of 
the financial affairs of the business men and capitalists who 
turn over to them their available stock of securities and 
cash, and leave to them the care of all their banking trans- 
actions. The business men have a credit or a debit excess 



159 



National Monetary Commission 

according as the receipts from the sale of their products 
and goods or the payments due by them in their business 
are the greater. Since they generally need temporary 
credits, discount their customer's bills, pay foreign bills, 
etc., a connection with a pure deposit bank with a limited 
range of business could be of no use to them. The real 
estate owner who turns over his rents to the bank, and 
makes his payments of mortgage interest and other 
expenses through it, is in the same position. The interest 
has frequently to be paid before the rents are collected. 
The capitalist who invests in stocks changes his invest- 
ments, accumulates money gradually for new investments, 
waits after the sale of securities or after the payment of 
mortagages and other outstanding dues for a favorable 
opportunity for investments, and until that time lets his 
money stand at interest. On the other hand, he uses an 
opportunity which seems favorable to him for purchases 
before the necessary cash is in his hands, and applies for 
a loan on collateral. For this capitalist also the connec- 
tion with a pure deposit bank, standing aloof from the 
stock and flotation business, would not serve. 

Since with the great number of accounts, and the diver- 
sity of the periods of money-need and money-surplus in the 
various branches of business a regular balance of deposits 
remains, the bank can pay an acceptable rate of interest 
for the latter, and out of the difference in rates, interest, and 
other profitable relations with its customers it can draw a 
profit exceeding the expenses of the business. The ex- 
penses of deposit banking are, however, so heavy that the 
mere interest-difference without the other transactions 



60 



Renewal of Reichsb ank Charter 

would suffice for covering them only with those banks that 
have a great many customers and very large deposit bal- 
ances. The business margin of a pure deposit bank would 
be unprofitable for many deposit banks, even in Berlin. 
The representation of business here given is not affected 
by the fact that the opening of an account is not made 
dependent on the proof of the prospect of profitable trans- 
actions — that, on the contrary, every respectable private 
citizen is provided with an account on making a deposit. 
The depositors of small savings, who in many places like 
Hamburg are not insignificant in number, and who, in 
Berlin, for example, find the deposit banks more con- 
venient because the receiving offices of the city savings 
banks are so far away, are of no importance in relation to 
the total amount of deposits . Only in the last few quarters , 
during which money has been high, and deposit banks were 
able to pay higher interest than savings banks, were a few 
accounts drawn from the savings banks and taken to deposit 
banks. As soon as money conditions become normal again, 
this money will probably flow back into the savings banks. 
I now proceed to the various assertions which are cir- 
culating abroad concerning the use of deposits and the 
cover provided for them by German banks. The first 
error, which might almost be called malicious, because it 
is contrary to the clear facts of the case, is the objection 
that the banks use their deposits for syndicate business 
and speculations in stocks. This is disproved by the pub- 
lished accounts furnished by the banks. The Frankfurter 
Zeitung has compiled very accurate statistics from the 
accounts rendered by the 45 joint-stock banks existing in 

83703 — 10 11 161 



National Monetary C omtnis s to 



n 



Germany that have a share capital of 10,000,000 marks or 
more. According to these statistics, the 45 banks had at 
the end of 1906, with a paid-up capital of 2,198,000,000 
marks, and a surplus of 542.000,000 marks — that is, with 
property to the amount of 2,740,000,000 marks — a total 
of 949,000,000 marks invested in syndicated shares and 
stocks owned by themselves; that is, only 34.6 per cent, 
or a little more than one- third of their capital and surplus. 
For none of the listed banks did the investment amount 
to more than 51 per cent of its capital and surplus. 

I will assume, for the sake of argument — though the 
generalization is far from being universally valid — that 
syndicated shares are to be characterized as nonliquid or 
risky investments ; and I will further accept the theories 
of the expert critics according to which only bills, reports, 
loans on collateral, and half of stocks owned by the bank 
itself are to be considered as liquid capital ; while the other 
half of the latter and all deposits on current account may 
be considered as less liquid, although with the foresight 
practiced especially by the banks that work with a great 
deal of outside money, the percentage of short-time loans 
is to be rated very high. It goes without saying that the 
most liquid investments correspond to liabilities demand- 
ing the quickest satisfaction, the next most liquid to the 
other liabilities, and the least liquid to the capital per- 
manently belonging to the bank. It is incontrovertibly 
proved by the above statistics that none of the banks in 
question have placed more than about one-half of their 
own property, and not a penny of deposits, in syndicated 
business and holdings of stocks. 



162 



Renewal of Reichsb ank Charter 

The statistics that follow afford a view of the cover 
existing for the banks' liabilities. Before proceeding to 
them, however, I wish to point out that in the normal 
course of business the duty of keeping a reserve against 
the circulating bank acceptances rests not upon the accept- 
ing banks, but upon the customers enjoying this form of 
credit. The major part of the bank acceptances arises from 
domestic and foreign trade. The purchaser of the goods 
desires to pay for them only on receipt, or a certain time 
after receipt, but the seller is empowered to draw on his 
bank at the time of sending the goods and to pay himself 
by discounting the draft. The purchaser of the goods is 
required to furnish to the accepting bank the cover for the 
draft before it falls due. Only in the abnormal case of the 
unfulfillment of this duty, therefore, need the bank provide 
for the cover out of its own capital, and it ought to be 
sufficient if the banks were required to keep a certain per- 
centage of their acceptance liabilities as security, for this 
case. As the critics have been accustomed, however, to 
take all the acceptances into consideration, I will place 
opposite each other the statements with and without 
acceptances. 

The 45 banks given in the statistics of the Frankfurter 
Zeitung (second page of the morning edition of April 4, 
1907) had, at the end of 1906: 

Liquid resources: Marks. 

Cash and bank credits 694, 450, 000 

Bills : 2 , 087, 340, 000 

Reports and loans on collateral i, 227, 370, 000 

One-half of the stocks and other securities 303, 660, 000 

Total 4, 312, 820, 000 

163 



National Monetary Commission 

Liabilities: 

Deposits i, 810, 920, 000 

Balances due on current accounts 3, 453, 820, 000 

Total 5, 264, 740, 000 

Acceptances i, 606, 670, 000 

Total 6, 871, 410, 000 

The total of outside moneys was covered to the extent 
of 81.92 per cent, and the total liabilities, including ac- 
ceptances, to the extent of 62.76 per cent. The table 
shows further that the amount of bills alone was consider- 
ably greater than the amount of deposits. 

If we take the four banks with the greatest deposit 
business (the Deutsche, Dresdener, Diskonto, and 
Darmstadt er) , the following figures result: 

Liquid resources: Marks. 

Cash and bank credits 358, 070, 000 

Bills 1, 066, 960, 000 

Reports and loans on collateral 578, 060, 000 

One-half of the stocks and other securities 133,810, 000 

Total 2, 136,900,000 

Obligations: 

Deposits _ 900, 570, 000 

Balances due on current accounts 1 , 663, 810, 000 

Total 2, 564, 380, 000 

Acceptances 706, 490, 000 

Total 3, 270, 870, 000 

The total of outside moneys was covered to the extent 
of 83.33 P er cent; the total liabilities, including the ac- 
ceptances, to the extent of 65.33 P er cent. 

When one considers that it was not thought necessary 
in the Reichsbank act to provide for the theoretically 

164 



Renewal of Reichsb ank Charter 

possible case of a presentation of more than one-third of 
the bank notes, since it requires a minimum cash reserve 
of only 33>3 per cent, the credit banks can not fairly be 
required to arrange their business so as always to be ready 
to pay ioo per cent of their liabilities. The covering of 
outside moneys by liquid resources, which, as is proved by 
the statistics, amounts to over 80 per cent of the total 
liabilities, or over 60 per cent if we include acceptances — 
and this in a year of such great tension on the money 
market as 1906 — this cover is so entirely sufficient that it 
is in no way inferior to that of the famous English deposit 
banks, quite apart from the fact that with the German 
credit banks the ratio of capital to outside moneys is much 
more favorable than with the English banks. The clas- 
sification of liquidity is with us clearly the same as in 
England, for, as the preceding speaker has already aptly 
shown, the items figuring in the English balance sheets as 
money at call and short notice are practically no other 
than what we call reports and loans on collateral. With 
full assurance, therefore, we can assert that the solvency 
of our credit banks carrying on deposit business fulfills 
throughout the strictest requirements dictated by the 
experiences of critical times, and that our credit banks 
are prepared to cope, if necessary, with a run on the 
banks. 

Whether the same thing can also be said of the com- 
munal savings banks is a question more difficult to 
decide, and one that is not to be answered directly from 
the experience of the last decade, in which the great 
increase of their deposits occurred, since we have not had 



165 



National Monetary Commission 

during this time a general collapse of confidence. The 
solvency of the savings banks, which have invested 61 
per cent of their deposits in mortgages and 28 per cent 
in securities, and have been compelled even in. these quiet 
times to write off half their surplus as a result of the fall 
in the market price of stocks, is certainly far inferior to 
the solvency of the credit banks. We are concerned here 
not merely with the certainty, guaranteed by the com- 
munes, that the deposits will be paid back at some time 
or other, but also with the question whether prompt 
payment in time of need is assured to the depositor, and 
whether the taxpayers of the communes are not made to 
suffer in consequence of their responsibility. 

Even less assured is the solvency of the Genossenschaf- 
ten, working with the "Centralgenossenschaftskasse." 
I have already stated, on the basis of official statistics, 
that the balance sheets of 5,685 associations show liabili- 
ties to the extent of 758,000,000 marks, or fourteen times 
the amount of their own means, and that their 811 ,000,000 
marks of assets comprise 16,800,000 marks in securities 
and 29,600,000 in mortgages, the remainder being in the 
form of secured loans. Even if (though it is not apparent 
from the statistics) a part of the assets is deposited with 
the Verbandskassen, and the "interest in the deposits 
with the Verbandskassen of the union banks," given at 
92,000,000 marks, is included in this, that makes the case 
no better, because the Verbandskassen, according to offi- 
cial statistics, work with outside moneys to the amount 
of nine times their own means, and have invested their 
capital in the same nonliquid fashion as the individual 



166 



Renewal of Reichsb ank Charter 

associations. The outstanding claims of these many 
associations with weak capital are obviously, both in 
quiet and in critical times, collected much more slowly 
and with greater difficulty than those of the credit banks. 
The Schultze-Delitzsch Genossenschaften, which have 
already withstood several crises and have learned by 
experience, keep within much narrower limits. If the 
Centralgenossenschaftskasse desires to maintain the ex- 
tremely artificial structure of its credit organization in 
times of crisis, it faces an extremely difficult task, since 
the capital of 50,000,000 marks assigned to it by the 
Prussian State is insufficient, even in ordinary times, for 
its business. The Centralgenossenschaftskasse had, ac- 
cording to its statement of March 31, 1907, besides 
32,000,000 marks of deposits, 57,000,000 marks of loans 
from banks and bankers, and it is known that it has 
frequently borrowed on security, not only on the Berlin 
Bourse, but also from foreign banks, at higher interest 
than it obtains from its own debtors, a course of action 
which I will not criticise in view of the usefulness of the 
institution to the community. 

It is a remarkable fact that the same political agencies 
which further with all their might the colossal credit 
tension of the associations at the cost of liquidity, and 
which neglect the reform of the communal savings banks 
(an urgent matter, and one with which they are more 
closely concerned) because they are loath to interfere in 
the interests of the classes that claim credit from the 
savings banks — it is indeed a strange phenomenon that 
these same agencies should go out of their way to attack 



167 



National Monetary Commission 

the deposit business of the banks. While we admit that 
there are objectionable features in the use made of 
deposits by the banks, the excitement over the matter is an 
illustration of the saying about the beam in one's own eye 
and the mote in the eye of another. 

Cui bono? The depositors are perfectly satisfied with 
present conditions. They have the choice between the 
savings banks, and in the larger cities a number of com- 
peting banks. They receive regular interest and have 
faith in the bank which they have chosen for themselves, 
and can change if they so desire. I am not aware that 
the depositors have demanded a change of existing con- 
ditions. In truth, our politicians and writers are rerum 
novarum cupidi; they are especially infected with the 
modern animus against great capital and great banks, 
and they believe that they have found the most sensitive 
point in the heaping up^ of outside moneys. Their 
attacks would receive less attention if they did not hold 
forth the prospect that certain minor popular aims 
would be attained as a result of their reforms — first, a 
better market for German state paper, and the mainte- 
nance of a higher level for the quotations of such paper; 
and second, a lowering of interest rates, and a moderation 
of the discount rate of the Reichsbank. 

The most radical reform proposed — and the one which 
its advocates pretend would be most effective in further- 
ing these two secondary ends — would put up with the 
deposit business of the credit banks as an unavoidable 
evil, but would regulate their business through compul- 
sory provisions, and prescribe for them the obligation of 



168 



Renewal °f Reichsb ank Charter 

keeping a certain fixed part of their deposits permanently 
invested in state paper. This is contrary to the ABC 
of the banking business, which consists in selling acquired 
securities in the quickest possible way, and having the 
utmost freedom in the prompt purchase of new securities. 
A finance minister who possessed some understanding and 
experience in the matter of flotations would never desire 
to have the syndicate, whose cooperation he wishes in a 
new state loan, already crammed with old stocks of state 
paper. The more this is the case the more anxious must 
the syndicate be, both with regard to the magnitude of 
the undertaking and its conditions. Vice versa, the freer 
it has hitherto been the quicker and the more cheaply 
will it be able to accept the risk of floating the new loan. 
The greatest danger of new flotations, however, is that 
the banks, already weighted down with earlier compul- 
sory investments, would throw on the market from their 
older stocks as much as they undertook of the new loan. 
That would be sure death for the market price of the new 
loan. Furthermore, the compulsory acquisition of state 
paper appears to me justified at most in so far as it 
applies to purchasers for whom permanent investments 
as such are economically rational, and who, therefore, in 
the choice between state paper and lower class securities 
or mortgages merely are directed toward the former. In 
this sense compulsory acquisition for savings banks and 
insurance companies is debatable, and in other countries 
is brought about legally or administratively. In Prussia, 
however, as I have already remarked, we have not even 
decided on any such measure with regard to the savings 



169 



National Monetary Commission 

banks. The introduction of a compulsory obligation for 
purchasers with whom, as with the credit banks, the 
fixing of capital in permanent or even long-time invest- 
ments is contrary to the nature of their business, would 
be about the greatest injury that could be inflicted on 
state credit at home and abroad. We should be reminded 
of the procedure of some eighteenth century princes who, 
being unable to sell the porcelain of their manufacturers, 
imposed on the Jews the obligation of buying a set when 
they married. The single practical method which can 
lead to a better rating of state paper, and to the elevation 
of the exchange level, is the progressive rise of the national 
prosperity and an intelligent observation of the actual 
condition of the money market with regard to the pro- 
duction of state and communal loans, the excessive quan- 
tity of which — particularly of the latter — is responsible 
for the present bad conditions. Everything else is 
quackery. 

Just as illusory is the hope of effecting a decrease in 
the rate of interest by such or similar means. The high 
price of money is indubitably the result of the fact that the 
capital devoted to the supplying of credit, in spite of the 
accumulation of all available capital, does not suffice for 
the satisfaction of the need for credit. In so far, there- 
fore, as the need can not in the judgment of the borrower 
be postponed, high interest must be paid; or if this can 
not be borne, the loan must be rejected. How, then, can 
one expect that a lowering of the interest rates will 
result if we withdraw from the reservoir of ready capital 
a part of the supply which affords credit, and use it for 



170 



Renewal of Reichsbank Charter 

other purposes? The opposite would certainly occur. 
And not only that, but such a measure would certainly 
cause an earlier rise of the money rate. For this it is not 
necessary that the means of granting credit be wholly 
withdrawn from the reservoir. Any limitation of free 
movement, any removal of credit from the place at which 
it was formerly sought to another place, with which the 
customer does not stand in the same relation, must oper- 
ate toward a higher rate. Under this head falls the 
proposal, hardly meriting serious criticism, forcibly to 
transfer a part of the capital from the banks which had 
been managing it to the Reichsbank, and to give the latter 
the task of using it. There is one view, to be sure, accord- 
ing to which this effect of premature dearness of money 
is expressly regarded as desirable. This recently revived 
idea was upheld as early as 1892 by the late banker, 
Caesar Strauss, who maintained that the scarcity of 
money which generally occurs at the climax of a period 
of prosperity, and which ushers in the reaction, should 
be shoved forward to the beginning of the period of pros- 
perity in order to guard against overspeculation and 
crises. Herr Strauss proposed to withdraw a great part 
of the interest-bearing deposits from the credit banks by 
means of an imperial deposit bank, whose direction he 
was ready to assume, under the protection of the Empire 
and of the Reichsbank. He proposed to check each 
developing period of prosperity w T ith forethought, even 
if without due consideration. Had this theory been put 
in practice since 1870, perhaps one crisis would have 
been avoided, but the preceding and following impetus 



171 



National Monetary Commission 

to development would still more certainly have been 
avoided, and patient Germany would have remained a 
poor country to this day. It is true that the economic 
progress of Germany since 1870 has not been regular, 
but has been interrupted every few years by retrogres- 
sions which partook more or less of the character of crises, 
and which involved considerable losses. But these were 
only temporary interruptions, and each retrogression was 
followed by a new extension of industrial activity which 
surpassed the earlier one and further increased the 
national wealth and the ability of the country to bear 
taxes. If we now stand on an equal footing with the 
other old civilized nations in commerce and shipping, 
agriculture and industry, if our ability to bear taxes has 
so greatly increased that there is hardly any complaint 
about the great expenses for army and navy, which 
seemed to many, even long after 1870, more than we 
could permanently bear, our credit banks may claim with 
pride that they, through their initiative, their participa- 
tion in industrial undertakings, and above all, through 
their courageous and at the same time careful supplying 
of credit, have contributed not a little to this happy 
development. This granting of credit has been profitable 
for creditor, debtor, and the whole country. 

The reformers assume the increase of national property 
at the rate of 3,000,000,000 to 4,000,000,000 marks yearly 
to be a statistically established fact; they assume further 
that this increase is bound to continue automatically, as 
though it were entirely independent of the present sys- 
tem of labor — that is, of the close connection subsisting 



172 



Renewal of Reichsb ank Charter 

between industrial enterprise and free mercantile move- 
ment — and as though this system could be replaced by 
a new one without danger. They seem to conceive of the 
accruing billions as like the cream on a jar of milk, which 
can be skimmed off and divided at will into regular portions 
between deposit banks, savings banks, cooperative associa- 
tions, trade, agriculture, and manufactures, without letting 
the big capitalists get so much as a taste of it. I only 
fear that the recipe of these alchemists might cause a 
watery decomposition of the milk. 

One of the most amusing schemes with regard to the 
money system is the programme now submitted to our 
consideration. It consists of two parts: First, we are 
bidden to economize metallic currency by means of an 
extension of the check system, and thus to strengthen 
the Reichsbank's stock of gold and facilitate a modera- 
tion of the discount rate; and, in the second place, at the 
very same time we are told to render it difficult for the 
credit banks to attract and utilize deposits. Banks and 
bankers have not the smallest personal interest in accept- 
ing for others the care of their business without charging 
a commission. Check business imposes upon them only 
sacrifices, great labor, increase of personal and business 
expenses, responsibility, and the unavoidable danger of 
loss in case of the smallest oversight of a subordinate. 
The sole and absolutely necessary compensation for these 
sacrifices is the attraction of low-interest deposits on check 
or deposit accounts, and the possibility of an extensive 
and profitable use of this money. If this chance is taken 
from them or made more difficult, the instinct of self- 



73 



National Monetary Commission 

preservation will force the banks to oppose vigorously 
their utilization for check business, and thus the whole 
movement for an improvement of the means of payment 
and an easing of the money market collapses utterly. 
Thus, as frequently happens, one horse is hitched before 
and the other behind the wagon. 

The other propositions for legislative regulation are as 
yet so obscurely formulated that it would not, I think, be 
worth while for us to concern ourselves further with them 
in the Bankers' Convention. 

No one has yet succeeded in finding a definition for 
deposit credits, or in setting forth serviceable distinctions 
between current account credits, report moneys and de- 
posits, or between deposits in the broader sense and sav- 
ings. And we may, for the present, well leave to scien- 
tific inquiry the question whether it would be possible to 
establish a right to the preferential payment of savings 
deposits. 

I should like to add a few further remarks concerning 
the proposed pure deposit banks. The above-mentioned 
Herr Caesar Strauss had shown the results of his labors 
to the Reichsbank and to Doctor Miquel, at that time 
Minister of Finance, in 1892; and he afterwards published 
them in a brochure. According to his plan, an imperial 
deposit bank, with private capital but under the protection 
and supervision of the Empire and the Reichsbank, was to 
be organized. The capital was fixed at 60,000,000 marks, 
with 25 per cent paid in. The institution was to have 
branches in the larger cities, while in all other banking 
cities the Reichsbank establishments would have to 



174 



Renewal of Reichs b ank Charter 

undertake gratis the acceptance of deposits and their 
repayment. Although the idea of responsibility on the 
part of the Empire — which has not even undertaken the 
guaranty of the obligations of the Reichsbank — or on 
the part of the Reichsbank was not included in the 
scheme, the project broke down under the objection that 
the name "Imperial Deposit Bank," and the cooperation 
required of the Reichsbank in the acceptance and repay- 
ment of deposits would be likely to awaken in the public 
the false notion that the Empire and the Reichsbank 
would have to bear the responsibility for the conduct of 
business. This reason will also prevent the execution 
of such a project in the future, and I believe, therefore, 
that the brief article recently published in the Tag by 
one of the provincial directors of the Reichsbank, in which 
the proposal of Strauss is again taken up, was written 
without consultation of the views of the Reichsbank 
management. 

In the year 1894, Herr Professor Doctor Warschauer 
proposed an imperial deposit bank with the same title, 
but with the modification that there should be supervision 
by the Empire but no cooperation with the Reichsbank; 
that it should have its own organization and numerous 
branches. He urged the scheme with fantastic representa- 
tions of the extent of business soon to be expected — a 
billion marks of deposits — and the profit to be expected — 
21 per cent to 22 per cent dividends. The professor was 
so confident of these high profits that he contemplated the 
immediate placing of shares of stock to the face value of 
50,000,000 marks, with 50 per cent paid in, at an average 



175 



National Monetary Commission 

price of 150; that is, at a premium of 100 per cent on the 
amount paid in, directly after the promotion. If high 
finance should take up with such a plan, the reproach of 
wanton stockjobbing would not be inapplicable. 

There is naturally no objection from any standpoint to 
the establishment of a pure deposit bank if it is estab- 
lished with private capital and without the false colors 
of an apparent imperial guaranty. The credit banks need 
not fear the competition of such new institutions. It 
would not, in any case, be worse than the competition 
which they have among themselves. But the ability of a 
new deposit bank set up in the grand style to earn profits, 
must, under the conditions that prevail in Germany, be 
regarded as highly doubtful. The business of such a bank 
does not generally become great at one stride, like a newly 
created central note bank, provided with the monopoly 
of issue. A deposit bank, if it does not take over a business 
already created, must begin small, and gradually move 
forward. The conclusion based on the ability of the 
English joint-stock banks to earn profits is incorrect for 
several reasons. The joint-stock banks do not have to 
compete for their deposits with a highly developed 
savings-bank system, nor for their stock business with 
joint-stock credit banks carrying on general business. 
They are, besides, not pure deposit banks, but at the 
same time the check and clearing banks of the country, 
and they demand from their current-account customers 
large balances, for which they pay either no interest 
whatever or only a very low rate. A fundamental 
difference arises, further, from the greater wealth and 



176 



Renewal of Reichsb ank Charter 

more conservative customs of English depositors, in con- 
trast to our own, who demand higher interest, and, as 
shown above, are mostly business men with temporary- 
need for credit. This being the case, the need for deposit 
banks has arisen only in a few places, as, for example, in 
Mecklenburg and Oldenburg, where, on the one hand, 
the moneyed public prefer the permanent possession of 
interest-paying bank deposits to the acquisition of securi- 
ties or mortgages, and where, on the other hand, the com- 
munal savings banks are less extensively developed. 
Here there are several banks, with branches in cities and 
villages, with relatively small capital and large deposits, 
whose business, with some variations, corresponds ap- 
proximately to the plan for deposit banks. In Frankfort- 
on-the-Main the Frankfurter Bank was transformed a 
few years ago into a deposit bank on surrender of the 
note-issue privilege. Its deposit business has not so far 
amounted to very much, since, with 18,000,000 marks of 
share capital, it has a yearly average of only 20,000,000 
marks of deposits. It is important chiefly as the deposit 
and transfer bank for the rich Frankfort families and as 
the administrator to whose management they intrust large 
quantities of stocks. Its income arises less from the 
difference in interest on deposits than from the large 
commissions derived from its other business. 

If, in consequence of a failure to recognize these facts, 
a deposit bank were to be instituted on a great scale in 
accordance with the suggestions of Strauss and Wars- 
chauer, with an extensive network of branches, it would 
be sure to end in grievous disappointment, since it would 

83703—10 12 177 



National Monetary Commission 

be loaded down in the first few years by the expenses of 
the business. A change may occur in the future if, with 
the further increase of national prosperity, the surplus 
profits of producers are no longer, as at present, used for 
increasing and consolidating their business, and the num- 
ber of capitalists becomes greater who, having no need 
to obtain credit, wish to have on hand in a bank large 
sums in the form of interest-bearing deposits. When we 
shall have arrived at this stage, pure deposit banks will 
arise of their own accord without legislative stimulus — 
partly through the transformation of existing institu- 
tions, partly through the establishment of new ones; and 
competition will bring it about that they voluntarily sub- 
mit themselves in their own interest to the limitations of 
business customary in other countries. 

I sum up my remarks by saying that the existing con- 
dition of the German banking system is throughout a 
satisfactory one, that the interests of the creditors of 
banks, as well as of the business requiring credit and the 
economic interests of the country, have obtained their 
full rights, and that legal or administrative interference, 
which might result in dangerous disturbances of our 
economic life, should be resolutely opposed. 

I have taken the liberty, as a supplement to the fore- 
going and to the remarks of the other speakers, to draw 
up a number of formal declarations. I am sure no one 
will object if I do not read them again; if necessary, 
they can be read out just before the vote is taken. I 
merely wish to remark that if No. 3 should not be re- 
garded as correct by individuals present — that is, if it is 



178 



Renewal of Reichsbank Charter 

thought that the banks of Mecklenburg and Oldenburg 
do not justify characterization as pure deposit banks to 
the extent which I have indicated — I should have no 
objection to the striking out of the middle passage or to 
a change in its wording. Personally, I hold the wording 
to be satisfactory and not open to misconstruction, and 
I shall wait to see whether a motion for a change comes 
from the assembly. 

Doctor Salomonsohn. Gentlemen, I wish to declare, at 
the beginning of my remarks, that I am in perfect agree- 
ment with the last speaker in all points. I am, with Herr 
Doctor JafTe, of the opinion that English conditions are 
entirely different from our own, and that a transference 
of English institutions to Germany should not be 
attempted without careful consideration. I am also, on 
the basis of my studies and the experience of many years, 
of the opinion that our German banking system, as it has 
developed, is much better than the English. I have 
taken the floor in order to discuss a few points which 
have not been raised in the main speeches. 

I turn, first of all, to the suggestions which Herr Doc- 
tor Jaffe gave at the close of his presentation. He asked 
us to consider whether it would not be advisable, in view 
of the further extension of deposit banking in Germany, 
to separate the deposits from the current-account credits 
on the books of the banks; secondly, to publish the 
balance-sheets of the banks monthly; thirdly, to separate 
the management of deposits from other moneys; and, 
fourthly, to introduce special securities for deposits. I 
should like to take up these questions from the stand- 



179 



National Monetary Commission 

point of the banker. Herr Geheimrat Mueller has 
already reminded us that the attempt to find a compre- 
hensive definition for deposits has not yet been successful. 
Therefore, the question answers itself — a separation of 
deposit accounts from the other accounts is not possible. 
We can not determine whether the money paid in is from 
surplus working capital or savings. Nor do I believe 
that the attempt to make such a distinction will succeed 
in the future. 

As for the question of the publication of monthly 
statements, Herr Doctor Damme has already shown that 
it would be an expensive and inconvenient affair. I am, 
however, of the opinion that in addition to this another 
disadvantage would be connected with it. In the first 
place, gentlemen, I take it for granted that those who 
make this proposal do not have in mind the publication 
of a complete and correct balance-sheet at the end of each 
month. That would be impossible at the end of the 
month. You yourselves know that the preparation of a 
bank statement requires at least two months. If we close 
on the 31st of December it is not possible, in spite of all our 
efforts, to present the completed balance-sheet earlier than 
about the beginning of March. It can, therefore, be only a 
rough balance. Such a rough balance gives no proper idea 
of the facts, and the greater the business is the less clear 
would it be. If the true condition of the bank is to be 
worked out from such a rough balance, then, as you all 
know, very large transfers must be made among the indi- 
vidual accounts. I will only remind you that the credits 



180 



Renewal of Reichsb ank Charter 

and debits must be equalized, whenever anyone has both 
a credit and a debit, so that these accounts will compen- 
sate each other. Credits and debits will always give, 
therefore, a false picture in the crude balance. The stock 
account will also give a false notion, because large amounts 
entered first on the securities account must be transferred 
to the interest and commission account, just as, on the 
other hand, the interest must be charged to the securities 
account. The publication of the crude statement at 
monthly intervals is in itself practicable, as is shown by 
the example of the Hamburg deposit and transfer banks, 
which publish their statements regularly every month. 
This plan has its objectionable side, however, especially 
in the case of banks that engage in the note-issue busi- 
ness on a large scale. Great business secrets might be 
betrayed through the publication of figures and the 
changes which occur from one month to another. Sup- 
pose, for example, that state loans have been under- 
taken, and that it is to the interest of the State that 
these operations remain secret for a time. The operation 
would forthwith become known if the securities account 
of the bank or banks connected with the State should 
rise suddenly to a great height. Let me further recall to 
your minds the Hibernian incident. People had become 
excited on the bourse over the continued purchase of 
Irish stocks, and they suspected that something was 
brewing. Suppose, now, that the Dresdener Bank and 
the Schaffhausen Bankverein had had to publish their 
balance sheets and reveal the increase of their securities 



181 



National Monetary Commission 

accounts by these enormous sums. I believe that the 
interest of the State, as well as of the banks, would be 
injured through such publications. 

With regard to the separation of deposit business from 
the other branches of business, I believe that every bank 
that carries on deposit business has really worked out 
this separation already. I believe that in every bank 
that devotes itself to deposit business on a large scale 
each deposit branch is treated as a separate business 
concern, which has its own bookkeeping, draws up its 
own balance sheet, and with regard to the main business 
stands in the position of an outside customer. 

The aggregate of the deposit branches is also placed, 
as a rule, under a distinct management. This demand is 
thus fulfilled; it is fulfilled, as a matter of course, from 
considerations of convenience and orderly management. 
In the same way the fourth question — that concerning 
security for deposits — is easily answered. It is a matter 
of course for a bank director to make sure every morning 
of what there is in the vaults and of what obligations he 
has incurred. These obligations include the liabilities 
that fall due each day, and, of course, also the deposits. 
These are demands which are fulfilled spontaneously. 

Now, I should like to discuss still another point which, 
strange to say, has not yet been mentioned at all. We 
are always talking as if deposit business lay only in the 
hands of the banks. But do not the private bankers also 
carry on a deposit business? Is the demand to be made 
in all seriousness that the private banker publish his 
accounts monthly, or would you forbid the private 



182 



Renewal of Reichsb ank Charter 

bankers to carry on deposit business? Certainly not the 
latter, I believe, and the former would be the death of 
the private banker's business. The confidence which the 
private banker inspires in his section of the public would 
very often be destroyed if he were compelled to set forth 
his sometimes limited property qualifications. His busi- 
ness does not rest so much on the strength of his capital 
as on his personal abilities, on his knowledge of banking 
and the bourse, on his character, and on the confidence 
which he has won for himself in the city and the province. 
This confidence, however, arises also largely from the 
belief of the public that the discretion with which it 
wishes its business transacted is better afforded by the 
private banker than by the joint-stock banks, supposedly 
more subject to public control and more exposed to state 
interference. This belief would be destroyed if the private 
banker were compelled to expose his business affairs. 

I should like now to add a little to what was said by 
Herr Geheimrat Mueller. Herr Geheimrat Mueller has 
pointed out that the Genossenschaft banks maintain a 
relation between their deposits and their own resources 
that is very different from that maintained by the big 
banks. In the case of 1,020 Schultze-Delitzsch associa- 
tions the deposits amount to three and a half times their 
own property, and in the case of 5,685 associations con- 
nected with the Prussian Centralgenossenschaftskasse 
about fourteen times their own property. I should like 
to compare in like manner the great, the medium, and 
the small joint-stock banks. The Frankfurter Zeitung 
has recently earned our gratitude by investigating the 



183 



National Monetary Commission 

smaller joint-stock banks, and has shown that there is 
one joint-stock bank which has 250,000 marks of paid-up 
capital and at the same time deposits to the amount of 
1,800,000 marks. I believe that the Frankfurter Zeitung 
deserves great credit for calling attention to these condi- 
tions. For this reason I have made a compilation of 
figures which is in many respects instructive. I have 
grouped together all joint-stock banks with a capital of 
less than 300,000 marks. In this class we find 52 banks 
with a total capital of 5,000,000 marks, a surplus of 
3,485,000 marks, and deposits of 69,000,000 marks. The 
same banks show 2,150,000 marks of cash and bank 
credits. Hence it appears that these banks have deposits 
to the extent of eight times their capital and surplus, and 
that their cash resources amount to 3% per cent of their 
deposits. A similar collection of statistics for banks 
with a share capital of from 300,000 marks to 1,000,000 
marks shows that we have 62 banks with a total share 
capital of 52,099,000 marks, a surplus of 10,427,000 
marks, and deposits of 174,800,000 marks; these banks 
held 16,395,000 marks in cash and bank credits. The 
situation here is, then, that the deposits are three and a 
half times the capital and surplus, and that the cash 
resources amount to about 9% per cent of the deposits. 
If we compare with these the 45 banks of the Frankfurter 
Zeitung, referred to by Herr Geheimrat Mueller, we find 
that the latter, with a responsible capital of 2,740,000,000 
marks, held 1,810,000,000 marks of deposits, and 694,- 
000,000 marks of cash and bank credits. The relation 
here is a very different one. The cash resources amount 

184 



Renewal of Reich s b ank Charter 

to 30 per cent of the deposits, and the latter do not form 
a multiple of the capital, but only 66 per cent of the re- 
sponsible capital. 

Gentlemen, it must be said at once that these condi- 
tions existing among the smaller banks are worthy of 
consideration, of observation, and of study; and indeed 
they furnish some ground for those who say that legal 
regulation is necessary. But in this matter, too, I urge 
you to be cautious. There is, for example, among these 
banks one which has 30,000,000 marks deposits, with a 
share capital of 1,200,000 marks. By chance I was 
asked once, years ago, whether it was advisable for a 
lady who had inherited some shares in this bank to keep 
them. I examined the statement of the bank in question 
and found that at that time it held about 25,000,000 
marks of deposits, while its share capital amounted to 
only 1,200,000 marks, and of these deposits 22,000,000 
marks were invested in mortgages. I was shocked, and 
said that it was no investment. I collected information, 
however, and investigated this bank somewhat more 
carefully. I then saw that it was a bank which ten or 
fifteen years before had risen out of a Genossenschaft, 
and that it had paid high dividends for years; and the 
information which I received from expert authority was 
to the effect that in spite of this immobile investment the 
bank was entirely sound, and that it was not likely that 
its deposits would be withdrawn in such a manner as to 
put it in danger. This latter assertion was based on the 
fact that the bank had its customers in local business, 
that very close relations existed between the directors 



185 



National Monetary Commission 

and the customers, that the depositors were also for the 
greater part shareholders, and that, as experience had 
shown, there was such a relation of mutual trust that 
apparently no sound objection could be raised against 
this bank. I received these facts from expert authority. 
We are thus warned that these questions must be handled 
with great caution. 

The statistics presented by me show, further, that these 
banks, in spite of the fact that they are joint-stock banks, 
have really preserved the character of the cooperative 
institutions out of which they sprang, and that people 
should beware of drawing general conclusions from these 
small joint-stock banks, and of considering principles and 
policies which may properly be applied to Genossenschaft 
banks as generally applicable to all joint-stock banks. 

I wish to say, in conclusion, that all the discussions, 
including my own, suffer from one great mistake. Not 
a single speaker has raised the question, "Where are the 
abuses?" Is there any practical reason for resorting to 
the bridle of legislation? If this question is raised, it is 
sure to be met with cries of "Leipziger Bank!" I have 
made a compilation for the last thirteen years, in order to 
establish what losses have really occurred to deposit 
creditors from 1894 until 1907. The Marienburg Private 
Bank is the last one in this list. If the joint-stock banks 
which have gone into bankruptcy during this period 
are selected, and if the quotas are considered which the 
depositors received, or will receive, in the liquidation, 
then there have been lost 24,000,000 marks in these 
thirteen years, including losses through the Leipziger 



186 



Renewal of Reichsb ank Charter 

Bank, the Marienburg Privatbank, and the Spar- und 
Vorschussbank in Dresden. This figure is large. If you 
consider, however, that, as the other speakers have con- 
vincingly set forth, these deposits are in reality not sav- 
ings, but in greater part working reserves of business 
men; if you further consider that the period under con- 
sideration includes not only a period of business pros- 
perity, but also one of depression, and, above all, a period 
of great bank failures, then you will agree that, though 
this figure in itself is large, the amount is hardly worth 
considering when compared with the enormous advantages 
for the national prosperity that have grown up through 
free movement in banking activity ; and you will conclude 
that there is no necessity for legislative interference. 

I wish to express my full and entire approval of the 
declarations that have been proposed by Herr Geheimrat 
Mueller. 

Mr. Bueck, general secretary of the Centralverband 
Deutscher Indus trieller. Gentlemen, do not fear that I, 
a mere layman, will attempt in this presence to add any- 
thing to the accurate, clear, and exhaustive contributions 
of the previous speakers, particularly the main speakers, 
or to supplement their remarks. I am not qualified for 
that, but I have had the honor of representing for thirty- 
four years not the economic interests of a single district 
or State, but those of the greatest and most important 
part of all German industry. I have, in this long period, 
passed through many changes from deep depression to 
high prosperity and back again, and have had an oppor- 
tunity of observing the extraordinary importance which 

187 



National Monetary Commission 

German banking has for industry. And so I thought 
that it might perhaps be to the point if, from the stand- 
point of a representative of the industrial interests, I 
were to confirm, only in bare outline to be sure, what has 
been said here so explicitly and so convincingly. 

Since the extraordinary scarcity and dearness of money 
coincided with a period of the greatest industrial develop- 
ment, I could not join in the laments over the situation. 
All industries were piled up to the utmost with orders 
which they could hardly fulfill. Many have, on that 
account, been strongly blamed, particularly the industries 
that supply raw material and half -finished products. 
They all naturally made the effort to expand themselves 
by enlarging their plants and by making new investments, 
so that these demands could be satisfied. This effort was 
somewhat checked by the increasing dearness of money. 
Though I do not by any means adopt the position of 
Caesar Strauss, yet I believe that this check has really 
operated favorably on our economic development. If a 
period of regression should again occur in our industries, 
then, as a result of these checks which have been in 
operation, the disadvantages and injuries for our whole 
economic life will not be nearly as noticeably destructive 
as if the justified efforts for extension had been given 
full play. But, gentlemen, a continuation of this condi- 
tion would operate injuriously on our economic life; 
and hence the efforts, which were discussed in the main yes- 
terday as well as to-day, to improve the money situation 
and to encourage it as far as possible, are explained. The 
chief means to this end lies in getting command of the 

1 88 



Renewal of Reichsb ank Charter 

newly created capital which has arisen in so many places, 
and in such different amounts — a process which, I believe, 
has been somewhat overestimated in recent years in 
point of the rapidity of its accomplishment and the per- 
manence of its effect. I believe that the first task is to 
bring together this newly created capital and to convey 
it again to the productive activities of the people. This 
is the task of our banking system. The first main speaker 
has characterized it as credit-concentrating activity. I 
should call it capital-concentrating and capital-distributing 
activity, and, gentlemen, it is of the greatest importance 
to our industries that banks and banking in Germany be 
not disturbed in this prosperous and fruitful activity. 
A disturbance would occur, however, if the goal sought 
by malicious persons and by theorists — that is, the separa- 
tion of banking into the two categories above mentioned — 
should be attained. 

The rapid development of our economic life has aston- 
ished the world. But we still stand far behind another 
modern state, which has not, as has our poor Fatherland 
in its time, been thrown centuries behind in the march 
of civilization. If we do not wish to stand still, if we 
wish, as we all do, to hasten and overtake the nations 
which have gone on ahead of us, then we must constantly 
convey the new capital which we create to the productive 
activities of the people. In other words, I point out only 
what has already been said, that we are not yet rich 
enough for this separation in our banking system. We 
have not as yet a million people, as in England, who pay 
their tailor bills and household expenses by check, and 



National Monetary Commission 

who have, according to our standards, great amounts 
lying in the bank, and are satisfied with a minimum rate 
of interest, or even no interest at all. Therefore it is 
clear that one of our most important duties is not to let 
the sources from which capital flows to our banks be 
disturbed or drained off. As has been repeatedly said 
with perfect truth by different speakers, these sources 
consist chiefly of working capital that is lying idle. It is 
necessary that this capital be conveyed to business through 
the banks without hindrance. And in this delicate matter 
it is proposed that legislation should interfere, though 
it would certainly cause a most lamentable disturbance. 
Gentlemen, with my scant stock of expert knowledge, I 
can form no conception of how it is possible for a manu- 
facturer, when he has surplus money, to give it to a de- 
posit bank, and when he needs money, to go to a so-called 
credit bank. I do not know whether such a banking 
system could maintain itself. Judging from the remarks 
of the third main speaker, I take it that it would be im- 
possible. It is also a question with me whether, even if 
such a law is passed, a sharp separation is at all possible 
with us — that is, whether the so-called credit banks will 
not enter as current accounts the sums brought to them as 
deposits. In all these matters our present tendency to 
interfere by means of legal regulation with the natural 
course of development is sure to work more harm than 
good. It has been said many times, by others as well as 
by the advocates of this complete separation, that abuses 
and injuries to the public are liable to occur. As the 
previous speaker has already explained to you, in this 



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Renewal of Reichsb ank Charter 

respect the case is really not so bad. In this connection I 
should like to call attention to a certain tendency to look 
in all directions for the economically weak, who must be 
protected against the supposedly strong. In this instance, 
the public, as the weaker part, is to be protected against 
the stronger banking world. This is the social tendency, 
and everything that is touched by it is rendered holy and 
inviolable. But, gentlemen, even the last secretary of 
the interior, Count von Posadowsky, frequently declared 
in the Reichstag that we must be careful not to weaken 
the self-reliance of the people by too much supervision 
and too much protection. If I am not mistaken, he used 
the expression once that we should be careful not to place 
a guardian at the side of each man, and that every one 
should be brought up to self-reliance and to a recognition 
of his own responsibility for the actions of his economic 
life. If a banker offers a customer 6 or 8 per cent, while 
the large banks will give only 3 per cent, he is a very 
foolish man and lacking in good judgment who trusts his 
money to the former in order to reach the golden moun- 
tain. No law can protect the stupid; to limit banks in 
their important operations for their sake would be a 
foolish proceeding. This would be especially regretted 
by industry, which recognizes the importance of a fully 
developed banking system. I would not go as far as the 
first main speaker, who says that the banks have been the 
pioneers of industry. I would reckon among these 
pioneers the enterprise of the manufacturers themselves 
and the great technical skill of those associated with 
them. But there is no doubt that industry is thoroughly 



191 



National Monetary Commission 

convinced of the importance to be attached to the banks 
in connection with all their undertakings. My esteemed 
friend and colleague, Doctor Beumer, intimated in the 
introduction to his remarks of yesterday that there has 
not always been harmony between banking and industry. 
It is the well-known case where the one must ask and the 
other should give. Gentlemen, there is perpetual ebb and 
flow in the business between the banks and industry, and 
it goes without saying that harmony can not always pre- 
vail. But, gentlemen, I can establish the truth of what I 
have already said, that industry fully recognizes the im- 
portance of banking, both in good and in bad times. 
Whoever recalls the times of the seventies and the terrible 
crisis — I see here some gentlemen whose hair has become 
gray as my own, and who know what times those were — 
will remember how the banks, themselves in great trouble, 
pulled a great many of our industries through, when for 
years prices stood below actual cost. It was the German 
banking system, not nearly as developed at that time as 
it is to-day, that stood faithfully by the side of industry. 
Industry will not forget that. It will also stand by you 
to-day when legislative measures are proposed which 
would be injurious to you. I believe I can vouch for your 
finding in industry — at least in the most important indus- 
tries, those from which support would count for most — a 
faithful confederate 

Mr. Max Schinckel. Gentlemen, I promise not to 
make large demands upon your patience. I can declare 
myself in harmony throughout with the remarks of the 
main speakers, especially- with Herr Doctor Jaffe's re- 



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Renewal of Reichsb ank Charter 

minder that if we wish to object, we should do so in time — 
that is, before the bills are introduced in the Reichstag. 
I can further declare myself also all the more in agree- 
ment with the address of Herr Geheimrat Mueller, since 
he took upon himself the unpleasant task of speaking the 
truth very plainly. That is good, even if not always 
welcome. But my very agreement with all this makes 
me the less able to subscribe to the third section of the 
resolution. To this I ask your attention for a few mo- 
ments. 

It is the purpose of the resolution, no doubt, and, as I 
take it, of the whole Bankers' Assembly, to declare openly 
and absolutely that there is no occasion for legislation. 
I see in section 3, however, a weakening which seems to 
me out of place. The last sentence of this section in- 
dulges in prophecies as to what may happen in the future. 
I am a decided enemy of prophecies when there is any 
question of their being put on record by publication. 
Whenever I have had a hand in them, they have always 
gone wrong. And it would be very gratifying to me if 
the author of the resolution would decide to strike out 
this part of section 3. The words are printed spaced. 
They read: " Spontaneously without legislative instiga- 
tion." Gentlemen, if it is expressly stated in the first 
sentence that there are already parts of the country where 
pure deposit banks are necessary, those who are bent on 
blessing us with a deposit bank law might hit upon the idea 
that before permitting pure deposit banks to be estab- 
lished, we should make legal regulations governing such 
permission. I am afraid this is not as it should be. I 

83703—10 13 193 



National Monetary Commission 

hope the author of the resolution will pardon me for 
saying so. I am not so well acquainted with Oldenburg, 
but I know that the Oldenburg banks can not by any 
means claim to be called pure deposit banks in the usual 
sense of the term. They are interested in syndicate 
business, and also give blank credits. That should not 
be permitted to the pure deposit bank, according to the 
view of the legislators. In the case of the Mecklenburg 
banks — for I am not only a citizen of Hamburg, but also 
of Mecklenburg — I assert emphatically that they are 
very slightly differentiated from most other banks by 
their business. They have the single peculiarity that 
they have an amount of deposits seldom attained by the 
commercial banks. The cause of this is natural, and 
does not lie in the fact that the Mecklenburg citizen 
refrains from investing his money in mortgages. On the 
contrary, he makes such investments with an astonishing 
confidence. I know properties — the alphabet has not as 
many letters as these properties have mortgages in 
amounts of from 2,000 to 3,000 marks for widows and 
orphans. However, there is in Mecklenburg a great 
need for investments, in spite of the fact that the people 
earn but little money, as they are mostly only small 
agriculturists. But if they only deposit as savings the 
amount by which Mecklenburg taxes fall below those 
paid in other parts of Germany, there must be a very 
considerable total. Furthermore, Mecklenburg — I am 
proud of being able to defend Mecklenburg — is ahead of 
all our other states in that it has issued no state loans since 
time immemorial. As a result, the public has no oppor- 



194 



Renewal of Reichsb ank Charter 

tunity to invest money in Mecklenburg consols. Finally, 
the people in Mecklenburg have had very bad experience 
with the Sterlitz Bank. What is more natural than that 
they should go to the two well-established banks which 
offer them comfortable interest, and which are enabled 
to do this not because they are pure deposit banks, but 
because they are in the fortunate position of standing in 
most highly favorable relations with some great banks 
in Berlin. The banks have half their money deposited 
with the Berlin banks. How are they different from 
any other bank if they deposit their money in other 
banks? They can not, therefore, call themselves deposit 
banks, and they would labor under the same disadvan- 
tage as the pure deposit banks if they did not find favor- 
able use for their money among their business friends in 
Berlin. I believe that we ought to put it to the main 
speakers — Herr Geheimrat Mueller has already half-way 
assented — whether it would not be well to drop this 
allusion to Oldenburg and Mecklenburg, partly because 
it can not be said that they are pure deposit banks, and 
partly on tactical grounds. I should not like to see the 
need of pure deposit banks recognized as yet. I do not 
care to make a motion, however, and I merely leave it to 
the main speakers whether and how far they will propose 
amending section 3. 

Geheimer Oberfinanzrat Mueller: I have already indi- 
cated that I will gladly strike out the parenthetical pas- 
sage in two places in so far as it relates to Mecklenburg 
and Oldenburg. As Herr President Schinkel has come 
forward as a Mecklenburger, I must defer to his greater 



195 



National Monetary Commission 

local knowledge. I have, however, already explained 
that these banks are not at all to be considered as pure 
deposit banks, and I must still maintain that of the 
existing banks in Germany they bear the closest resem- 
blance to one's idea of pure deposit banks. 

On the other hand, I am not in favor of any further 
elisions. To my mind what we are here giving expression 
to is not prophecies, for which I also have no inclination, 
but the desire to meet a present need on the basis of present 
conditions, the consequent decision to wait for the future 
to show whether a greater need will arise, and finally the 
assertion that even if a greater need should arise, legal 
interference would not be necessary. It is therefore, I 
believe, quite proper to reply to those w T ho now demand 
action from the legislator that at this time there is no 
economic need, and if later such a need should occur, 
legislative interference will not be necessary even then. 

The President. Gentlemen, I regret that a motion has 
been put to close the debate, which is signed by not less 
than seven gentlemen, while seven still remain on the list of 
speakers. Is a motion to close supported? (Cries of 
"Yes.") Will the gentlemen rise who are for closing the 
debate? There seems, unfortunately, to be a very great 
majority for closing it. Therefore, I close the debate. 

Justizrat Cruger. I can, unfortunately, only express 
my regret at being unable, because of the close of the 
debate, to correct some misconceptions in the address of 
Herr Geheimrat Mueller, concerning the financial condition 
of the credit associations. 

The President. I suppose, gentlemen, that you forego 
the second reading of the resolution. (Agreement.) 

196 



Renewal of Reichsb ank Charter 

Number 3 is changed so that the first sentence now reads : 
"A need * * * has not yet arisen in Germany." All 
the rest remains, except that in the last sentence the ref- 
erence to Oldenburg and Mecklenburg is struck out. Will 
the assembly accept the resolution as a whole with these 
changes? (Agreement.) Will those who are opposed 
raise their hands? (None vote.) I declare, therefore, 
that this resolution of the German Bankers' Convention 
has been unanimously accepted. 

The resolution above referred to is as follows: 

ON THE QUESTION, IS THERE NEED OF LEGAL REGULATION 
OF DEPOSIT BANKING IN GERMANY? 

i. The organization of banking and of credit existing 
in Germany, the peculiarity of which consists, on the one 
hand, in the union of general banking business with the 
management of outside moneys, and, on the other hand, 
in the intimate relation of banking to commerce and 
industry, has grown out of the economic development of 
Germany and has greatly contributed to the extraordinary 
growth of industry and the resultant increase of national 
prosperity. 

2. Since the communal savings banks, developed in 
Germany more than in other countries, attract the savings 
of the laboring classes and the middle classes and afford to 
these a regular interest, the deposits flowing to the banks 
and banking houses are only in the smallest degree savings 
deposits properly so called; they are generally working 
reserves of business men, who also have their other finan- 
cial affairs transacted by their banks ; or temporarily 
available capital of capitalists, destined to later invest- 

197 



National Monetary Commission 

ment in securities, mortgages, etc. These two categories 
of depositors attach great importance to the fact that the 
same bank to which they give their money for interest 
serves them for all kinds of banking transactions, espe- 
cially the granting of temporary credits. 

3. A need for the establishment of pure deposit banks 
has not yet arisen in Germany. Such a need may arise 
in the future if, with further increase of national pros- 
perity, the surplus profits of business men are no longer 
used, as they have been hitherto, for the enlargement 
and consolidation of plants, and if, as is even now the case 
in France and England, the number of those becomes very 
great who have considerable capital to put out at interest. 
In this stage pure deposit banks will arise spontaneously 
without legislative instigation, partly through the trans- 
formation of existing institutions and partly through the 
establishment of new ones; and competition will of itself 
result in their voluntary submission to the limitations of 
business customary in other countries, because it is to 
their own interest to do so. 

4. According -to the experience of other countries, a 
pure deposit bank can yield a profit and pay its depositors 
an acceptable rate of interest, only if the amount of de- 
posits is many times greater than that of the paid-in capi- 
tal. The conditions for this do not yet exist in Germany, 
apart from the exceptions mentioned in 3.* The over- 
whelming majority of depositors who now hold deposits 
with the credit banks could not be afforded the service by 

a As appears from the discussion, the mention of these exceptions was 
stricken out from section 3 before the resolution was adopted ; the fact that 
they were referred to in section 4 was evidently overlooked. — Translator. 

198 



Renewal of Reichs b ank Charter 

a pure deposit bank which they expect from their bank- 
ing connection. A pure deposit bank, which must main- 
tain a network of deposit offices in great cities and with 
branches in the provinces, would, in view of the narrow 
bounds within which its profit-bearing use of its funds is 
confined, be overwhelmed by the expenses of the business. 

5. The fact that the business of credit banks that man- 
age deposits is not subject to control must be taken into 
connection with the fact that the ratio of their own capital 
to the amount of deposits, and to the total of outside 
moneys, is decidedly higher than in the pure deposit banks 
of other countries. The statistics of the balance-sheets 
of all joint-stock banks of any importance that take part 
in deposit business show that the resources held as cover 
have satisfied the heaviest demands made upon them by 
critical times, both in point of their ratio to obligations 
incurred and in point of fluidity (bills, reports, loans on 
collateral and their own stocks, the latter calculated at 
one-half). The fact that the cover consists chiefly of 
bills and reports enables these institutions to be much 
more prompt in repayment of outside moneys than are 
the communal savings banks, which invest more than 
three-fifths of their deposits in mortgages. 

6. Legislative experiments which proceed, out of theo- 
retical considerations, to transplant forcibly from a wholly 
different historical background the best institutions of 
other countries to our banking system — which has had a 
very healthy development of its own — might easily cause 
dangerous disturbances of our economic life, and should 
therefore be resolutely opposed. 



199 



IV 

Credit at the Reichsbank 



By DR. R. KOCH 

Former President of the Reichsbank 



(Article from the Zeitschrift fur Haiidehwissenschaft -and Handelspraxts, July, 1908) 



20I 



IV. CREDIT AT THE REICHSBANK. 

Dr. R. Koch, former president of the Reichsbank. 
(Article from the Zeitschrift fur Handelswissenschaft und Handelspraxis, July, 1908.) 

In the general discussion anent the impending exten- 
sion of the note privilege of the Reichsbank but little is 
heard now of the demand, made occasionally in former 
times, that the State take over the Bank and operate it 
as a state institution. It has become an almost undis- 
puted axiom that special bank credit — distinct from the 
credit dependent on the Imperial or State Government — 
is useful and indispensable, particularly during a crisis. 
Elasticity of circulation would soon cease, the note would 
soon degenerate and assume the character of common 
paper money, were the issues regulated by considerations 
other than those of business requirements. 

This idea was expressed with great precision in the 
reports of the committees both of the French Chamber of 
Deputies and of the Senate on the occasion of the latest 
renewal of the charter of the Bank of France. 

"A state bank," said the report of the chamber com- 
mittee, "means the power granted to the Government of 
issuing unsecured paper currency and induces the temp- 
tation of creating notes secured not by known resources 
(mainly short-term securities) in liquid shape, but by the 
general resources of the State; in a word, of issuing fat 
money, which at the slightest crisis would meet with the 
same fate as the assignats of the Revolution." 



203 



National Monetary Commission 

The senate committee report contains the following 
statement : 

" In the first place, the danger to any bank of this type 
(i. e., a state bank) lies in this, that it is subject to the State 
and exposes the latter, as proved by experience, to the con- 
stant temptation to use the Bank to settle its own financial 
difficulties at the risk of the credit of the Bank, and thereby 
causing harm to the credit of commerce and industry." 

But equally imminent would be another danger. The 
note banks, as is well known, grant as well as receive 
credit. They discount short-time bills and grant loans 
upon the pledge of certain classes of securities (Banking 
Act, par. 13); the bills, together with national currency, 
gold bullion, or foreign gold coin, and Imperial Treasury 
notes, serve as reserve for the bank notes (Banking Act, 
par. 17). In the case of a pure state bank there would 
be the particular danger that the granting of bank credit 
would be determined not by pure business principles, but 
by considerations of a more or less political nature. 

"The state bank," says the report of the French cham- 
ber committee, "means business mixed with politics." 
And the senate committee points out further consequences. 
"Then there would be the danger of mixing questions of 
finance with political discussion, of considering, for ex- 
ample, discount rates in the same spirit as matters of tax- 
ation and of injecting political passion into the solution of 
these most delicate, complex, and oftentimes almost im- 
ponderable questions . ' ' 

The debates in the Reichstag have demonstrated that 
this danger exists even with our present "mixed" bank- 



204 



Renewal of Reichsb ank Charter 

ing organization, notwithstanding the compliments and 
praises bestowed on it by the leaders of French bimetal- 
lism, such as Meline. Complaints were heard about an 
excessively high discount rate even in years in which for 
months the rate was low (as for instance in 1905, when 
the average rate was as low as 3.82 per cent), although 
this rate depends essentially upon supply and demand in 
the money market. It was charged that artisans without 
property and small tradesmen are given no credit or but 
little credit, and that other industrial groups which are 
compelled to tie up for a long term their otherwise ample 
capital are but little able to avail themselves of the ad- 
vantages of dealings with the bank. 

The expert perceives at once the utter groundlessness 
of such complaints. The Reichsbank has never been 
operated otherwise than upon pure business principles. 
It gives bill credit as a rule only against merchandise bills 
whose value must be extant either in goods sold or in the 
proceeds of such sales, or against bankable credit bills — 
i. e., bills presented by bankers who make a business of 
furnishing credit on commission. 

It does not give credit against finance bills. In other 
words, the bill presented for discount must represent a 
real transaction, terminating at the maturity of the bill, 

a The French report containing the argument of the government bill 
expresses similar apprehensions, though only with reference to a pure state 
bank: 

"It is not merely that a state administration would not possess the 
necessary suppleness required to estimate commercial solvency and to 
adopt the terms of credit to market conditions, but above all because 
it would be assailed by all sorts of demands and propositions, all tend- 
ing to make it depart from the rules of prudence which a bank of issue 
ought to observe." 

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National Monetary Commission 

as was insisted on in the instructions to the branches of 
the Bank as late as 1906. For agriculturists, indeed, the 
Bank has always made considerable concessions at certain 
times. Thus, for example, the Bank allows them a single 
extension in view of the slow turnover of their circulating 
capital. In general, however, the extension of the bill 
credit granted, especially in case of a previous promise to 
that effect, has always been prohibited. It is possible 
that younger managers of the numerous subbranches 
may have erred at times in this respect, being misled 
either by an excess of business zeal or by a misconception 
of the true state of things. They surely have not done 
so with the view of increasing their commissions, for such 
commissions, in the shape of small shares in the profits, 
are allowed only to the managers of the so-called inde- 
pendent branches (about 80 in number), but not to the 
managers of the subbranches. Moreover, these allow- 
ances are merely credited and not paid in cash, and 
against them are charged, without recourse to legal action, 
all losses which may result during the tenure of the 
respective officials from obligations assumed by the 
branch. This practice has stood the test of time as a 
sufficient means of security and a satisfactory though not 
excessive stimulus of business activity. To abolish this 
practice would be not only unwise but even risky. Since 
the earliest period means of control have been used to 
prevent as much as possible extensions of loans of the 
above kind. It is true that the monthly reports of com- 
mercial credit granted do not always reveal loan exten- 
di Regulation of the year 1856; see Jubilaumsdenkschrift, p. 79. 

206 



Renewal of Reichsb ank Charter 

sions as such. A change in the amount and parties may 
easily cover up the transaction. On the other hand, 
however, a discounting of a bill oftentimes assumes the 
aspect of a mere loan extension, when as a matter of fact 
it is a bona fide short-term commercial credit transac- 
tion, in case, for instance, the seller of goods continuously 
draws in round sums on account of the buyer upon the 
latter 's bank. This practice is quite frequent in case of 
bank acceptances. There may also be a gradual with- 
drawal of a deposit, representing the original proceeds of 
goods sold. Abuses arising from these incidents of busi- 
ness life are counteracted by the fairly frequent inspec- 
tion tours of members of the central administration. But 
inasmuch as abuses have been discovered on such occa- 
sions, it would be well to insist that in case of larger bills 
all parties to the bill as well as its origin should be speci- 
fied and clearly indicated. 

To demand more would be impracticable. Any head- 
long move in doing away with the objectionable credit 
bills would merely tend to increase similar engagements 
on the part of the large private banks. 

The rule that the Reichsbank shall not grant credit for 
a period longer than three months must be adhered to 
strictly. For only such short-time notes are sufficient 
legal security for the notes and guarantee their continu- 
ous redemption as well as the repayment of the giro- 
deposits. 

With the view of facilitating the business opportunities 
of the less-favored classes the Reichsbank as early as 1878 
reduced considerably the minimum amount of capital 



207 



National Monetary Commission 

required for direct discount operations with the Bank. 
In spite of this the business with the smaller tradesmen's 
class continued to be limited. In view of the obligation 
of the Bank to redeem daily many millions of bank notes 
presented to it, besides disbursing many millions on giro- 
accounts, no further favor could be shown to this class, 
all the more because the small trader as a rule is unable to 
present the requisite discount material. In most cases 
the bills originating from small dealings lack the proper 
second signature (Bank Act, par. 13; No. 2, par. 17), and 
are therefore unfit for discount. This industrial class 
must therefore make use of other banking agencies. 

Foremost among the latter are the cooperative socie- 
ties. In view of the joint liability of their members a 
much larger share of the societies' property could be used 
all along as a basis for credit transactions. However, the 
law of May 1, 1889, having permitted also the operation 
of societies with limited liability, and the experience with 
these societies having been favorable, the limited liability 
principle has since 1896 been extended to all larger cooper- 
ative societies. 

Through these societies the small tradesmen in an indi- 
rect way may also obtain credit from the Reichsbank. 
Further facilities for the discount business are afforded 
by the continuous extension of the network of branches, 
especially that of subofhces, a and by the enlargement of 
the collection districts of the various Reichsbank offices. 

o In 1907 the number of branches, subbranches, etc., was 478. Of this 
total 4 subofhces were in that year changed into Reichsbank offices, while 
9 subofhces were opened. In 1906 the number of newly opened subofhces 
was 26. 



208 



Renewal of Reichsb ank Charter 

In this manner the Reichsbank continuously becomes 
possessed of large amounts of bills, in which the fluctua- 
tions of business conditions find their clear expression. 
The amounts of bills purchased show an almost uninter- 
rupted increase. For the last two years the amounts rep- 
resented by discounted bills were as follows : 



[In millions of marks.} 








1906. 


1907. 




4,360 
5, 853 


4.997 
6,885 








10, 213 


11,882 







The Reichsbank gathers among its holdings a very con- 
siderable portion of all the bills drawn and put in circula- 
tion in Germany. In the memorial volume describing its 
experience during the first twenty -rive years of its exist- 
ence, the Reichsbank was able to point out that the pro- 
portion which its average yearly domestic bill holdings 
bore to its total capital investments varied between 79.5 
per cent for the year 1881 and 88.3 per cent in 1876. ° 
Accordingly, the Bank purchased almost two-fifths of all 
German bills (in 1899, 39 per cent). The ratio of its 
average bill holdings to the total bill circulation is smaller 
because of the shorter time its bills run (between 11.3 per 
cent and 15.8 per cent). 6 Generally speaking, the Bank 
attracts a larger share of the bill circulation in times of 
business expansion than in times of business stagnation 
or depression. The fact that since its foundation its 
share of the entire bill circulation of the country has in- 

a Jubilaumsdenkschrift, p. 88. b Jubildumsdenkschrift, ibid. 

837 3— IO 14 209 



National Monetary Commission 

creased rather than diminished is explained by the 
growing demand for credit and for instruments of payment 
due to the growing business activity of the country. The 
Bank was able to satisfy this demand by means of the 
giro (transfer) deposits, which have been flowing to it m 
large amounts, though not to the extent that might have 
been expected in view of the increase in the facilities and 
of the advantages of the giro business. 

The bill business is by far the leading asset business of 
the central bank of issue. The economic strength of the 
Bank rests primarily upon this class of business, espe- 
cially upon the great liquidity of its bill holdings. The 
Bank is thus enabled to withstand successfully even severe 
crises. It can enlarge the circulation of its notes with- 
out hesitation, since it knows that the ensuing return 
current will bring back to it the means required for their 
redemption. 

The other class of the Bank's business — loans on col- 
lateral — are of much smaller relative importance, though 
far from insignificant when taken by themselves. Loans 
on merchandise have indeed gradually become less 
important as compared with loans on securities. Thus 
at the end of 1907, outstanding loans on hypothecated 
merchandise amounted to only 5,486,400 marks, while 

a During recent years there has been an increase in the amounts of foreign 
bills purchased by the Bank with the view of strengthening the gold reserves 
and preventing an outflow of gold from the country which might necessi- 
tate an increase in the discount rate. These purchases, it is needless to 
state, are much below the purchases of domestic bills. They averaged 
44,461,000 marks in 1907, as against 43,244,000 in 1906, and amounted to 
71 million marks under date of May 7, 1908. These totals do not include 
the deposits with foreign correspondents. 



210 



Renewal of Reichsb ank Charter 

the total loans on securities were 358,802,350 marks. In 
the western part of Germany this form of loans is not 
customary, nay, almost of ill repute, while in the eastern 
and northeastern provinces of Prussia, with their relatively 
sparse and mainly agricultural population, there is still a 
certain demand for loans on merchandised 

The total of loans on collateral has increased almost 
uninterruptedly, notwithstanding the limitations to be 
presently mentioned. 

Loans on collateral during the last four years were as 
follows : 



Year. 



1904 
1905 
1906 
1907 



Total amount. 



Marks. 
1,957, 411.820 
2,093, 427.625 
2, 773. I9L475 
3. 293,301, 200 



Average 
amount out- 
standing dur- 
ing the year. 



Marks. 
74, 180, 000 
72,033,000 
83, 631, 000 
98, 140, 000 



The law (Bank Act, par. 17) prohibits the use of col- 
lateral as security for note issues, and this fact of itself 
prevents the undue increase of the collateral loan busi- 
ness. There is good reason for the discrimination. "In 
point of quick and safe realization," the jubilee memorial 
of the Reichsbank rightly remarks (p. 105), "the invest- 
ments in loans on collateral are in no way to be compared 

a Certain facilities in the collateral loan business are accorded mainly for 
the benefit of agriculture. Thus, since 1887 the Bank has loaned on spirit 
in bond stored in private warehouses without specification, appraisement, 
taking possession, or revision; since 1895 on bonded sugar on similar terms; 
and since 1896 on grain stored on the estates without regard to the legal 
difficulties involved in this particular class of transactions. 



211 



National Monetary Commission 

with bill holdings, carefully selected in accord with bank- 
ing principles." For a loan on collateral is always far 
less transparent than a bill. As a rule, it affords no crite- 
rion to judge of the kind of credit sought. In many cases 
the loan is intended to supply the need of working capital, 
a fact which is more easily recognized in the case of bills 
offered. Granting even that a painstaking selection of 
the pledges may render the security beyond doubt, yet 
the quickness and even the possibility of realization 
remains dependent upon the absorbing power of the 
market. Experience has proved that in times of severe 
crises even the most solid securities can not be disposed of 
at all or only at great loss. The provision of a maximum 
limit of loans on collateral, to be determined after con- 
sultation with the central executive board (Banking Act, 
par. 3 2d), had proved altogether ineffective long ago for 
technical reasons. 

The best means of keeping these loans within the neces- 
sary limits is the interest rate. Instead of other restric- 
tions which might injuriously affect the borrower, the 
Reichsbank has for a long time kept the interest rate of 
loans on collateral uniformly higher than the discount 
rate, the difference for the recent period amounting, as 
is well known, to i per cent. a But for this policy, the 
temporary increases of this class of loans — especially at 
the end of the quarter — due to the ease with which money 
can be borrowed from the Bank for a few days — would 

a The administration of the Bank upon mature deliberation refused to 
follow the Reichsbank resolution of 1899, which recommended the lowering 
of the rate by one-half per cent (Report of committee, p. 31 and following, 
56 and following; stenographic report, p. 1892). 



Renewal of Reichsb ank Charter 

have become even more noticeable than they now are.° 
In 1884, when money was relatively abundant, a prefer- 
ential interest rate, exceeding the discount rate only by 
one-half per cent, was accorded exclusively on loans 
secured by Imperial and State bonds. The purpose of 
this measure was to raise these bonds to the position of 
standard securities for the well-to-do classes. This pur- 
pose was fully attained, though as a result the loans on 
collateral grew out of all proportions and far more rapidly 
than the bill holdings. 6 The lower rate could not be 
maintained indefinitely and was abolished July 1, 1897. 
The liquid character of the Bank's assets, and hence its 
power of resistance, had been notably diminished. When 
next all classes of collateral securities were placed on the 
same level with regard to the interest rate, the situation 
was reversed immediately. The average amount of loans 
on collateral declined considerably, due mainly to the 
decline of loans on the favored bonds named, while the 
bill holdings showed an increase. c Whether the change 

a Compare weekly review, for example, page 67 of the report of 1907. 

Marks. 

September 7 69, 800, 000 

September 30 204, 100, 000 

December 7 78, 500, 000 

December 21 364, 300, 000 

& The average for 1896 was 131.28 per cent higher than the average for 
1883, constituting 14 per cent of the total investments of the Reichsbank, 
as against 1 1 per cent in the earlier year. 

cThe annual averages were as follows: 



Year. 


Loans on collateral. 


Bills held. 


1896 


Marks. 

106, 000, 000 

72,000,000 

83,000,000 

98, 000, 000 


Marks. 

646,000, 000 
908, 000,000 
989,000,000 


1 90s 




1907 







213 



National Monetary Commission 

affected the quotations of these bonds is very doubtful. 
As a matter of fact, immediately after the abolition of 
the preferential interest rate quotations rose slightly. In 
the course of time (though for different reasons) there was 
a decline in all security values. It was seen, however, 
that the old differences between the formerly preferred 
securities and other investment securities, as for instance, 
mortgage bonds — because of the wider market of the 
former — remained unchanged. 

The privileged treatment as collateral by the Bank did 
not prove sufficient to raise the quotation of the favored 
securities. An argument against the often suggested 
reintroduction of this preference is also derived from the 
fact that, so long as the preference lasted, demands were 
constantly made for its extension to other classes of securi- 
ties, and that these demands ceased with the abolition 
of the preference. a The Bank can not afford to grant 
these demands, since a reversal of its policy would result 
in an increase of loans on collateral even beyond the 
figures reached in 1906, with all the disadvantages attach- 
ing to excessive investments in this class of loans from 
the point of view of sound banking principles. Moreover, 
there would be a renewal of the old struggle on the one 
hand between the Bank administration and the advo- 
cates of a preferential rate of interest, and on the other 
between the Bank and the various interests which for- 
merly clamored for the extension of the preferential rate, 
such as the cooperative land credit associations (Land- 
schaften), mortgage banks, provinces, communes, dis- 

o Even the Reichstag passed without debate a resolution to this effect. 

214 



Renewal of Reichs b ank Charter 

tricts, etc., as well as a renewal of the struggle among 
these various interests. While these struggles were not 
the motive that led to the abolition of the preference, 
yet their cessation is an undoubted advantage, which 
may be lost with the renewal of the privilege. 

So much for the loans on collateral, which for that 
matter are limited by law to certain well-defined and 
specially secure objects of hypothecation. 

The purchase of domestic bonds — acceptable as collat- 
eral — constitutes another kind of credit (granted to the 
debtors on said bonds) . Since this form of credit implies 
to a certain extent the tying up of operating capital, the 
Bank is permitted to grant it only under certain precau- 
tionary restrictions. (Bank Act, par. 13, No. 4; par. 32, 
sec. 2d.) 

The Bank is not permitted to grant credit in other 
forms, particularly blank credit. No credit can be 
granted for outside account without previous security. 
(Bank Act, par. 13, Nos. 5, 6; par. 40, No. 11; Reichs- 
bank charter, par. 10.) 

a In 1906 an extension of the privilege to mortgage bonds issued by 
the Landschaften was demanded by a deputy, who happens to be also an 
officer of a Landschaft. 



215 



V 

Concerning the Collateral Loan Business of 

the Reichsbank, Especially the Loaning 

on Imperial and State Securities 



By DR. R. KOCH 
Former President of the Reichsbank 



(From the Deutsche Revue, July, 1908) 



217 



V— CONCERNING THE COLLATERAL LOAN BUSINESS 
OF THE REICHSBANK, ESPECIALLY THE LOANING 
ON IMPERIAL AND STATE SECURITIES. 

Dr. R. Koch, former president of the Reichsbank. 

[From the Deutsche Revue, July, 1908.] 

The credit of the Reichsbank is, as is known, frequently 
demanded not in the form of the discounting of bills, but 
in that of loans on collateral — that is, interest-bearing 
loans on negotiable securities of definite kinds. (Bank 
act, sec. 13, No. 3.) The rate of interest is to be publicly 
announced in the same way as the discount rate. (Sec. 15, 
ibid.) This rate, as well as changes in the principles on 
which and in the period for which credit is granted, is 
passed upon by the central committee, as is the case in 
the discount business. (Sec. 322, ibid.) There is, how- 
ever, a comprehensive and important difference. Loans 
on securities are not adapted as reserve against notes. 
(Sec. 17, ibid.) This provision, which is incomparably 
more important than the more or less insignificant one 
which prescribes that the central committee is to decide 
concerning the maximum amount to which the funds of 
the bank may be invested in loans on securities (sec. 32*2, 
ibid.) , is very expressive of the fact that credit granted on 
collateral is not of the same value for the central bank 
of issue as credit allowed on the security of bills of exchange, 
but is subject to certain objections inherent to it in its 
relation to the general policy of the bank. Now, it may 



219 



National Monetary Commission 

appear strange on a superficial examination that the bank 
law should express such a lack of faith in resources repre- 
sented by loans on collateral, which are (theoretically at 
least) of undoubted security. In this respect they are at 
times superior to bills, which rest purely on personal credit ; 
and, as experience has shown, they have resulted in 
extremely small losses to the Reichsbank/' Yet there 
is a good reason for the restriction of their volume. For 
a bank of issue the aggregate of whose investments must 
always be on a level with that of its obligations, it is not 
merely a question of safety, but fundamentally of the 
liquidity of the investments. No person who has any 
acquaintance with such matters will believe that loans 
on securities can be compared with discounts represented 
by bills carefully chosen according to sound principles 
of banking — with respect to the possibility of quick 
realization. Loans on security are always lacking in the 
quality of transparency, it being often not easy to see 
what is behind them. They do not rest in all cases on 
a basis of substantial business dealings like commercial 
bills, and in particular bills drawn against the delivery 
of merchandise, which always presuppose the existence 
of the equivalent in commodities, or as the net proceeds 
of a sale. Often they serve rather for the creation of 
operating capital that has been lacking, without one's 
being able to judge clearly, as with many classes of bills, 
how far this is the case. In general, there are no indica- 
tions as to how the credit sought is going to be used, while 
the probability of punctual repayment depends upon 

a Jubildumdenkschrift, p. 122. 



Renew a I of Reichsb ank Charter 

just this factor. It is thus possible that the bank may 
be compelled in time of crisis, when its own customers 
are falling into arrears, to proceed to realize on securities 
in great quantities, in order to protect its 2,000,000,000 
marks and more of demand liabilities. Experience has 
taught that there is not at all times a ready market for 
pledged securities. There are times when it is impossible to 
realize on them, or at least not practicable without great 
losses. That such losses have not hitherto occurred is 
only explicable by the careful and conservative policy that 
has been pursued in the business of loaning on collateral. 
The lending of money on securities is only an incidental 
part of the business of a bank of issue. Since there is less 
of a periodical return current than in the discount business, 
this department of the bank's activity has not so much 
to do with the regulation of the monetary circulation. 
For this very reason it is much easier to limit operations 
in this sphere. On the other hand, the danger of immo- 
bilizing the capital invested in loans on securities exists 
even with the safest securities. Therefore the demand 
to enlarge the capital of the Reichsbauk in order to pro- 
vide for the extension of its loan business should be 
opposed. a 

a Adolph Wagner (Zettelbankpolitik): "It is easy to perceive that this 
branch of the business (loans on securities) is rather to be entirely avoided." 
In another place: "Special care should therefore be exercised in granting 
loans on securities, and only a moderate extension should be given to this 
branch of the business in general." 

Michaelis (Volkswirtschaftliche Schriften): "Loans on securities are an 
unhealthy source and basis of note issues. They create new means of 
payment, while the function of notes, properly considered, is to take the 
place of instruments of payment previously created (commercial bills)." 



221 



National Monetary Commission 

Naturally the business could only be extended by low- 
ering the rate of interest on such loans, since the bank 
does not now reject any legally permissible application 
for a loan, and an increase of such applications could 
only be called forth by cheaper rates. This rate of in- 
terest is always kept at i per cent higher than the rate 
of discount on bills as a matter of principle. Efforts 
have been repeatedly made to lower the rate of interest 
on loans and to bring it closer to the bill rate. The 
practice of some of the German private banks of issue 
seems to speak for this plan. They have made it their 
custom to evade the limitations in the matter of the 
discount rate imposed by the supplementary bank act 
of the 7th of June, 1899, by loaning liberally on promis- 
sory notes. The practice of individual foreign banks 
which have made much of the loan business by reason 
of the small volume of bills brought to them for discount 
points in the same direction. But the Reichsbank, in 
its capacity as the regulator of the monetary conditions 
in the country, could not, in view of its own experiences, 
after repeated consideration of the course pursued by 
other institutions, be induced to yield in the face even of 

In the French bank investigation of 1865, which, as is known, was 
practically fruitless, only a few bankers (including Pereire) declared them- 
selves in favor of a large extension of the loan business. The majority of 
the chambers of commerce desired that the bank limit these loans still 
further, if it did not altogether suppress them, since they favored specula- 
tion more than substantial business. 

In the German bank investigation of 1908, the subject of lending on 
securities is taken up only with respect to a secondary point in the question 
sheet: " Is an advance in the price of loans on securities at the Reichsbank 
at the quarter days through the increase of the number of days for which 
interest is reckoned to be recommended?" 



Renewal of Reichsb ank Charter 

the desire of the Reichstag. a Other restrictions, such 
as were formerly practiced at times by the Prussian 
Bank, are more or less arbitrary and in any case deal 
harshly with the borrower. The efforts made in years of 
quiet banking to put life into the loan business by means 
of fixed loans for six weeks and three months at a moderate 
rate of interest were fruitless. An unfavorable aspect of 
this kind of business, which the bank could not help 
realizing is the circumstance that the volume of loans on 
collateral is subject to great fluctuations. It is some- 
times quite large, notwithstanding the high rate of 
interest. 5 A variation from the discount rate of less 
than i per cent would undoubtedly increase it further 
and add to the disadvantages which a large investment 
in loans on securities brings with it. c 

The unfavorable experiences which the Reichsbank 
has had with the establishment of a reduced (preferential) 
rate of interest for certain securities are also to be cited. 
Not that this arrangement in itself was opposed in many 
circles — a lower rate is always welcome to those seeking 

a Report of the Reichstag Commission of 1899, pp. 31 ff., and 56 ff.; 
Stenographic Report, p. 1992. 

b In the year 1906 the maximum investment in such loans was 
284,520,000 marks (31st of December); the minimum, 50,899,000 marks 
(226I of September); average, 83,631,000 marks. In the year 1907 the 
maximum was 364,297,000 marks (31st of December); the minimum, 
54,090,000 marks (23d of January); average, 98,140,000 marks. 

c Adolph Wagner (Zettelbankpolitik): "The higher rate of interest for 
loans on collateral is wholly justified in banking. It maintains in the first 
place a higher insurance premium as compared with the discount rate, 
since the security is often inferior to that of bills; furthermore, as everyone 
knows, the ability to realize on the investment is better assured in the 
case of discounts by the strictness of the legal provisions regarding bills 
of exchange. 



223 



National Monetary C ornmis s io 



n 



credit. It was the compass of the plan, the steadfast 
refusal of the Reichsbank management to extend it to 
other securities, which many desired, that brought violent 
attacks upon it; and even if these attacks were in no 
way decisive, they contributed to a removal of the 
differential. In 1884, when money was very cheap, the 
Reichsbank decided to lower the rate of interest by one- 
half of one per cent on loans secured exclusively by bonds 
of the Empire or of the German states, particularly in 
order to favor investment in these securities (as so-called 
standard securities). This purpose was indeed attained, 
and the loan business showed immediately increased 
activity. The average volume of loans on securities 
increased from 45,800,000 marks in 1883 to 49,200,000 
marks in 1884, in spite of an easier money market. a 
But at the same time there was a serious displacement 
or shifting of the component of the bank's investments. 
While the bill portfolio increased by 76.4 per cent from 
1883 to 1896, the volume of loans on securities increased 
by 1 3 1. 3 per cent, rising to an annual average of 
106,000,000 marks, of which 71,800,000 marks was at 
the preferential rate. The loans on securities, which in 
1883 had amounted to only 11 per cent of the average 
total investments, reached 14 per cent in 1896. The 
situation changed unfavorably relatively to the really 
normal investments, namely bills, which through their 
greater liquidity assure the stability of the bank in 
times of crisis. Such a development could not be per- 
mitted to go on. 

a Jubilaumsdenkschrift, p. 117. 
224 



Renewal of Reichsb ank Charter 

The preferential rate was suspended, therefore, after 
the ist of July, 1897, with the consent of the Imperial 
Chancellor. All securities on which loans could be 
made were thereby placed on a level as far as the rate 
of interest was concerned. The selection of securities 
on which a favorable rate might be allowed — a very 
dubious operation — was done away with. The desired 
effect was not lacking. The average investment in bills, 
which in 1896 had amounted to only 646,300,000 marks, 
rose in the year 1906 to 989,400,000 marks, and in 1907 
to 1,104,500,000 marks. The average aggregate of loans 
on securities fell from 106,000,000 marks in 1896 to 
83,600,000 marks in 1906. By the year 1900 it had grad- 
ually fallen to 80,000,000 marks — that is, in a time 
in which the economic development of the country 
occasioned large drafts on bank credit. A feature of this 
retrogression was that it involved mainly the imperial and 
state securities, and was scarcely felt at all in the case of 
the other securities. In 1896 there was an average of 
71,800,000 marks invested in loans on the former, or 67.7 
per cent of the total loans on securities, while the loans on 
other securities aggregated 27,900,000 marks, or 26 per 
cent of the total. By the 15th of August, 1907, the 
amount of loans made on the favored securities had fallen 
to 39,200,000 marks, which was only 49.3 per cent of the 
total loans on securities. 

The amount of loans on the securities not included 
among the favored obligations has not greatly changed.** 

°The Jubilaumsdenkschrift, p. 119, indicates the shifting of the risk 
in loans on securities which has thus been effected. All central note 
banks make it a point to adhere closely to a proper apportionment. 

83703—10 15 225 



National Monetary Commission 

It was 22,800,000 marks on the 7th of September, 1900, 
or 32.7 per cent of the aggregate amount of loans on 
securities, and 25,800,000 marks on the 15th of August, 
1907, or 32.5 per cent of the total. 

In view of these striking results, the reintroduction of 
the favorable rate for imperial and state paper, which is 
desired by some business men, especially bankers, can not 
be considered. The liquidity of the total investments 
would thereby be seriously influenced, and the ability of 
the Reichsbank to withstand all dangers would be mate- 
rially weakened. 

The difference in the quality of securities is expressed 
in another manner by the practice of some banks of issue 
of making the percentage of the market value up to which 
they are willing to lend money smaller in the case of 
some kinds of securities than in the case of others. a This 
would hardly be in accord with the bank act, which per- 
mits loaning on domestic securities in general only up to 
three-fourths, and on foreign securities only up to one- 
half of the price quoted at the exchange. (Sec. 13, No. 
3 b, c.) The former practice of the Reichsbank of pla- 
cing the various kinds of securities in different classes — 
at times a very perplexing operation — did not work well 
and had to be given up many years ago. Only a uniform 
treatment of all securities capable of serving as collateral, 
enabling the bank to dispense with the necessity of 

° For example, the Bank of France makes loans on French rentes and 
treasury bills up to 80 per cent; on other securities up to 75 per cent. 
The Russian Bank loans on imperial securities and those guaranteed by 
the Government up to 90 per cent; on other securities up to 75 percent or 
80 per cent. 



226 



Renewal of Reichsb ank Charter 

selection, is in accord with that broad and sound policy of 
maintaining a moderately large volume of loans on 
collateral and assuring the utmost liquidity of the securi- 
ties pledged. 

The maximum limit set by the bank act, which has 
gradually been extended from 90,000,000 marks to 
120,000,000, 150,000,000, and in the year 1890, to 
180,000,000 marks, has long since proved impracticable. 
The volume of loans on securities is very fluctuating. 
The demand for credit at the end of the month is usually 
very large, as is indicated by the interrogatory relative 
to the quarter days in the question sheet submitted to 
the Bank Inquiry Commission of 1908. The banker ob- 
tains the means of supplying further credit at such times 
by getting loans on securities at the Reichsbank as the 
last source of credit in the country. The ability of the 
banker to help himself for a few days with the advances 
received is for the good of business in general, and is of 
special significance at the quarter days because of the 
strain in the money market. A few days before their 
advent the aggregate of loans on securities increases very 
rapidly, only to decrease as rapidly again in the ensuing 
periods This difference is revealed as well in the indi- 
vidual branch institutions. Some have lesser, others 
larger, temporary demands upon them. There is no 
telling in advance, especially in the case of loans on 
securities. The needs of individual industries and other 
branches of business change very rapidly. Just on this 
account such loans can not be limited for the individual 

a Jnbildumdenkschrift, p. 117. 
227 



National Monetary Commission 

branches of the Reichsbank (numbering 486 in June, 
1908). The technical difficulties which such a course 
would encounter are insurmountable. The restriction 
has therefore been more and more in abeyance. There 
would have been no sense in trying to exact a penalty for 
each of the numerous transgressions. The rate of interest 
remains the only efficient instrument for keeping this 
business within limits consistent with liquidity. 

The constant decline in the prices of our government 
bonds, which are so splendidly secured, is certainly a 
lamentable phenomenon. Whether, however, the reintro- 
duction of a preferential rate of interest would afford 
a means of effecting a change is very questionable. The 
previous experiences of the Reichsbank do not warrant it. 

In the year 1884 a gradual improvement in the quota- 
tions manifested itself, the indications of which had already 
been visible some time before. But in 1897, after the 
suppression of the preferential rate, no tendency toward 
a decline in the quotations showed itself. Throughout 
July there was rather a slight advance. From 1896 to 
1900 there was indeed a great decline in these securities, 
traceable to general economic conditions, and in recent 
years the downward tendency has been even more marked. a 



a The following are the quotations for the first of February in the years 
1906, 1907, and 1908: 




1906. 


1907. 


I9o8. 




89. 20 
101. 10 

89. 20 
101. 20 


87. 30 

98. 20 
87.3O 
98.25 










82. 80 


3 14 per cent Prussian consolidated loan 


94-5° 



228 



Renewal of Reichsb ank Charter 

The reasons for this hardly admit of dispute. Chief 
among them are the great and almost regular increase 
in the volume of imperial and Prussian loans and the 
opportunities afforded the public of obtaining larger 
returns from industrial investments. There has been a 
similar decline in the case of other German investment 
securities paying a fixed rate of interest. No tendency on 
the part of the favored securities to come down to the level 
of the unfavored has ever been noticeable. Where such 
a distinction exists and has always existed, the greater 
market for the former class of securities is to be regarded 
as the cause, and not the exceptional position accorded 
them in the matter of collateral. This plays hardly any 
role whatever for the simple reason that those who benefit 
by the preference get the profit — and that only a mod- 
erate one — for a short time only. It can no longer offer 
a special inducement for the continued creation of this 
class of securities. A better rating of these securities 
is to be expected from them as a permanent investment 
in which only the rate of interest is considered than from 
the former policy of increasing their availability as 
collateral. 

In view of all this, the expected advantage of the 
reintroduction of the practice of giving preference to 
certain securities for borrowing purposes is so question- 
able that it does not justify us in endangering an impor- 
tant principle of bank policy or of abandoning it alto- 
gether. To this is to be added, finally, the certainty 
that the old demands would immediately arise again to 
extend this advantage to other securities. Not only 



229 



National Monetary Commission 

would it have to be given to the bonds of all the federal 
states/ but likewise to the debentures of the Prussian 
agricultural credit associations a and those of the mort- 
gage banks (which help to support municipal credit), 
to provincial and municipal bonds, fresh issues of which 
are continually burdening the market, as well as to other 
obligations. The struggle began immediately on the part 
of the agricultural interests when the Reichstag incident- 
ally recommended the reintroduction of the preferential 
rate. 6 This apprehension is therefore surely not un- 
founded. If the Reichsbank should resist any such 
demands, as it can not help doing, the old attacks upon 
it would be renewed in a way that would seriously and 
unjustly injure its credit. 

a See Debates of the Reichstag, 2d of March, 24th of March, and 18th 
of June, 1S96. 

b See Debates of the Reichstag, 28th of May, 1906. 



230 



VI 

Concerning the Renewal of the Reichsbank 

Privilege 



By PROF. W. LEXIS 
Of the University of Gottingen 



(Article from the Bank-Archiv, 1907, page 309) 



231 



VI— CONCERNING THE RENEWAL OF THE 

REICHSBANK PRIVILEGE. 

Prof. W. Lexis, of the University of Gottingen. 

[Article from the Bank-Archiv, 1907. page 309] 

The renewal of the Reichsbank privilege signifies, in the 
first place, that the Imperial Government thereby re- 
nounces the right reserved by it in section 41 of the law 
of the 14th of March, 1875. The suppression of the Reichs- 
bank, permissible according to point (A)° of this para- 
graph, is practically considered; it is only a question of 
point (B), according to which the Imperial Government 
is authorized to acquire the total stock of the bank. In 
either case one-half of the available surplus would go to 
the shareholders. The question that has to be decided is 
as to whether the Reichsbank shall have its privilege re- 
newed or become wholly a state institution. State owner- 
ship, as is well known, finds numerous advocates, whose 
contention is based on an argument which is undoubtedly 
very weighty. The shareholders received in the year 1906 
a dividend of 8.22 per cent, or a total amount of 14,790,724 
marks. A significantly higher share went to the Empire, 
namely, 25,472,181 marks, but this share would have been 
increased by about 8,000,000 marks if the Empire itself 
had owned the bank capital of 180,000,000 marks. This 
capital could have been acquired without difficulty by the 
issue of 2>% V er cen ^ bonds, even at the unfavorable rate 
of 93. The objection is frequently made against state 
ownership of the Reichsbank that in the very improbable 

a Cf. — German Imperial Banking Laws, p. 52. 
233 



National Monetary C ommis s io 



n 



event of a foreign invasion the metallic cash and other 
property of the bank — if these belonged to the State — 
would fall into the hands of the enemy. But undoubtedly 
an enemy invading Germany would not proceed otherwise 
than did the Germans in the invasion of France in 1870. 
The Bank of France does not stand in nearly so close a 
relation to the State as does the Reichsbank, for it is not 
wholly managed by state officials; only its governor and 
two subgovernors are appointed by the Government. 
Nevertheless, the cash in the branch offices which could 
not be removed to a place of safety in time — for example, 
several million francs in Strassburg — was seized by the 
advancing German troops, and the legal questions in- 
volved remained undecided until the end of the war. 
At that time consideration was undoubtedly taken of the 
fact that the notes of the bank had possessed forced cir- 
culation (Zwangkurs) since the nth of August; but we 
should not delude ourselves into thinking that the Reichs- 
bank notes would not also be invested with the quality 
of a forced currency in the unfortunate event of war. 

Other arguments, however, really speak in favor of the 
system of a central bank of issue, run by private capital, 
and in more or less close relations to the State. It is inter- 
esting to note that this system occurs in almost all of the 
large states of Europe — in England (the Government has 
no direct share in the management of the Bank of Eng- 
land, but its notes have legal tender power), in France, 
in Austria-Hungary, and in Italy. Russia alone has a 
pure state bank, with state-owned capital, but it can not 
be said that this example is especially worthy of imitation. 



234 



Renewal of Reichsb ank Charter 

It is not well for a great bank of issue to be actually 
merged in the state financial system, even if it appears 
externally independent. It is likewise undesirable that 
it be subjected, as a pure state institution, to political and 
party influences. In Germany attempts to impose de- 
mands on the Reichsbank contrary to its purpose and its 
real duty have not been wanting. Its duty is, according to 
the law, "to regulate the monetary circulation of the 
whole Empire ; to facilitate payments ; and to promote the 
utilization of available capital;" but not to create cheap 
credit which is not warranted by the conditions of the 
money market. It may not grant long-time credit, such as 
the agriculturists, who have to reckon upon an annual 
period of settlement, demand. This agricultural need for 
credit must be relieved in other ways. For reserves against 
bank-note circulation only short-time bills — or loans on 
. collateral — can be used. These involve a quick, auto- 
matic return of the notes, which makes it possible for the 
bank to regulate their emission at any time in accordance 
with the needs of business and the requirements of public 
welfare. Therefore, when the bank discounts mercantile 
bills by preference, it does not do so because it desires 
especially to favor commerce and industry, but because it 
can not do otherwise, according to the nature of its task, 
inasmuch as it is only in these bills that it finds the proper 
covering for its notes. It is very important for the gen- 
eral interest that the bank does not exceed the limits to 
which it may grant credit, as the Russian Imperial Bank 
has done. These limits are conditioned by its nature as a 
bank of issue. The officials of a pure state bank have 



235 



National Monetary Commission 

merely to adapt themselves to the regulations coming to 
them from above; but a bank of issue with private capital, 
even when entirely managed by the State, has a sort of 
independence as regards the State — an independence 
which protects it against interference with the vital 
conditions of its existence. For the former, the inter- 
ference of legislation is always needed; but the latter 
must always keep in mind the fact that a great private 
capital is in its charge. The central committee of the 
Reichsbank has undoubtedly only a very moderate 
authority, but its influence, nevertheless, is far greater 
than that of the advisory board of a state railroad com- 
pany, because it represents the owners of the bank capital. 
If the Imperial Government should take over the bank, 
the shareholders would receive the capital and half of the 
surplus, a total of 212,400,000 marks; that is, their shares 
would be redeemed at the rate of 118, while they now 
stand at 154, and have generally fluctuated between 150 
and 160. The shareholders could not complain of this, as 
the law provides for the possibility of the state ownership 
of the bank under these conditions, and this fact has 
exerted a certain constantly depressive influence upon 
the rate. Since the shareholders are generally bankers or 
other moneyed people, the opinion will prevail in many 
circles that they deserve no consideration whatever. 
Nevertheless, it should be recalled that they did not 
acquire the shares originally at par. At the foundation of 
the Reichsbank half the capital was created by taking 
shares of the Prussian Bank, which at that time stood at 
155, in exchange for shares of the new bank. The other 



236 



Renew a I of Reichsb ank Charter 

half was obtained by subscription at the rate of 130. 
When the capital was increased on the basis of the law of 
the 7th of June, 1899, 30,000,000 marks were issued in 
1900 at 135 and 30,000,000 marks in 1904 at 144. The 
latter emission would hardly have succeeded if the sub- 
scribers had considered it a serious possibility that they 
would be repaid at the end of 1910 at 118. They would 
then have lost 18 per cent in six years, or an average of 3 
per cent of their capital yearly; and even if they had 
drawn during all this time an 8 per cent dividend on their 
nominal capital the real interest on their investment 
would have been only 2.6 per cent. The Imperial Gov- 
ernment thus, by the high rate of the new shares, en- 
couraged the subscribers in the idea that it did not con- 
template state ownership of the Reichsbank; otherwise, 
the proper course would have been to issue the new shares 
at 118 and reserved them for the shareholders. Should 
state ownership take place, there would be no legal 
objection, but it would be a hardship which would not 
strike millionaires exclusively. Furthermore, a dividend 
of more than 8 per cent has been paid only once since the 
readjustment of the division of the profits of the Reichs- 
bank, namely, in the year 1906, at the time when the 
overstrain of credit reached such a high point. On the 
average, during the years 1 901-1906 the dividends 
amounted to only 6.55 per cent, and in 1902 to only 5.47 
per cent. Since no shares were issued below 130, the 
average dividend amounts, even for the original subscrib- 
ers, to only 5 per cent on their invested capital. Of the 
premium on the shares first issued, Prussia received 



237 



National Monetary Commission 

15,000,000 marks in 1875 as compensation for the transfer 
of the Prussian Bank, and the remainder was turned into 
the reserve fund; half of this, however, is to be considered 
as belonging to the Imperial Government. 

But if, as is to be expected, the privilege of the Reichs- 
bank is actually renewed, then the further question arises 
whether on this occasion material change should be made 
in the legal provisions concerning the bank. Of first 
importance is the question whether the amount of notes 
not covered by coin or bullion shall be restricted in the 
hitherto-existing manner. In the last nine months, with 
the continually high discount rates, this arrangement has 
been frequently attacked and held responsible for these 
high rates. The bank, in endeavoring to fulfill properly 
the task of regulating the money circulation, would have 
found difficulty in maintaining a lower interest rate, even 
without the limitation of note issue and the note tax. 
The nature of its task is that it shall maintain the value 
of the monetary unit as stable as possible, in whatever 
form this is expressed. In times of economic prosperity 
the prices of goods rise, primarily as the result of the 
actual extension of national production, which brings 
an increase of the national income with it. At the same 
time, however, comes the tendency for prices to rise still 
further through the extended application of the purchasing 
power, resting on credit, but expressed in terms of mone- 
tary units. This kind of rise in prices, however, signifies 
nothing else than a corresponding depreciation of the mone- 
tary unit. If it is not checked, the whole system of prices 
rises higher and higher, until it finally collapses in a crisis, 



238 



Renewal of Reichsb ank Charter 

perhaps at the slightest shock. The Reichsbank can, in 
any case, exert a very limited restraining influence upon 
this movement, for it surpasses the other great banks 
only in the volume of its discount business, the volume of 
its loan transactions being comparatively unimportant, 
whereas the five large Berlin private banks, at the end of 
1906, reported an aggregate of 2,650,000,000 marks in 
loans on collateral and current credit advances. All the 
same, the advances of the discount rate of the Reichs- 
bank act like brakes upon the wheels of business, pre- 
venting them from traveling too rapidly. It would not 
be arguing soundly to say that because the bank would 
not act otherwise even without the limitation of the note 
issue this limitation is therefore unnecessary. Rather 
assert that it is expedient that such a fixed norm should 
exist for the regulation of further note issues, according 
to which the bank is not only to guide itself, but the 
operation of which contributes to enlighten and warn the 
public concerning the situation. 

The arrangement by which the Reichsbank is permitted 
to issue notes up to a certain amount and can go beyond 
that amount only by the payment of a tax on excess cir- 
culation is a means of keeping the issue of notes within 
bounds. And even on this ground the limitation must be 
retained, for bank notes are still too significant in German 
monetary circulation in comparison with the conditions 
attained by more progressive countries. In England 
there have been no uncovered notes in circulation for 
more than ten years; the bullion stock of the Bank of 
England is, as a rule, several million pounds greater than 



239 



National Monetary Commission 

the sum of the circulating notes of the bank. On the 
1 7th of July, 1907, for example, the bullion stock amounted 
to £35,900,000 and the volume of the outstanding notes 
to only £29,300,000, while there were £25,100,000 in the 
reserve of the banking department. At the same time the 
total stock of gold coin and bullion of the United Kingdom 
was estimated at only £120,000,000, while the gold stock 
of Germany is at least 3,700,000,000 marks. The average 
stock of gold (not the stock of cash) of the Reichsbank, 
however, amounted in the year 1906 to only 675,000,000 
marks, with an average note circulation of 1,387,000,000 
marks. From these figures a backwardness of the German 
payment and credit organization is evident, which would 
only be greatly increased by making the issue of uncov- 
ered notes easier. In Germany, too, the opinion is bound 
to gain ground that a lower interest rate is not condi- 
tioned upon a great quantity of effective circulating 
medium, whether gold or bank notes. In England the 
bank rate recently stood at 2 per cent and the private 
discount rate at seven-eighths of 1 per cent, but the 
stock of effective circulating medium was not greater 
than in the year in which the discount rate rose to 6 per 
cent. In the most highly developed modern states money 
plays only the role of a measure of value. It is of rela- 
tively small significance as regards the actual circulation 
of goods. The interest rate, however, depends upon the 
amount of free capital available for new investments at 
any time, which is measured in terms of money, but is 
invested in cash only for the smallest part. In the United 
Kingdom at present the sum of the deposits of the cus- 



240 



Renewal of Reichsb ank Charter 

tomers of all banks and banking houses amounts to 
about £900,000,000, and this gigantic sum includes the 
greater part of the circulating capital of the nation. 
Transfers are continually made from one account to 
another without the aggregate being noticeably changed. 
With this amount remaining the same, however, the 
quantity of free capital contained in it and exerting an 
influence on the interest rate, can vary greatly. If an 
account holder must transfer that sum which is credited 
to him to-day for the fulfillment of obligations falling due 
on the morrow, then he possesses no free capital, and the 
greater the number of bank customers who find them- 
selves in such a position the smaller is the total sum of 
free capital. Free capital arises, in general, only from 
profits and surplus of incomes and from finally repaid 
investments of capital — for example, government bonds 
which have been repaid. No real free capital can be created 
by an increase of note issue having no substantial founda- 
tion. Such issues as those against loans on securities, or in 
connection with the discounting of finance bills, etc., only 
raise the nominal price of goods or securities, prolong an 
unsound condition, and make its evil consequences worse. 
We come, therefore, again to the fundamental prin- 
ciple that the issue of notes is not to be made easier, 
since thereby the attainment of a rational system of cir- 
culation is made more difficult. This rational system, 
as it exists in England, not only serves the purpose with 
the smallest possible gold stock, but it permits the most 
complete and rapid utilization of the free capital avail- 
able at any time. It is therefore very desirable that the 

83703— -jo 16 241 



National Monetary Commission 

agitation recently inaugurated for the extension of the 
check system should be completely successful. It is 
a matter of course that indorsement and clearing must 
accompany this business, for a check which is paid in 
cash fails of its proper purpose. Whether this develop- 
ment could be greatly furthered by the acceptance of 
interest-paying deposits by the Reichsbank appears 
doubtful; for the first result would probably be that the 
volume of deposits of this kind flowing to the other banks 
would be correspondingly reduced. If, however, the 
general public were to get more into the habit of having 
an account at a bank, then the Reichsbank might receive 
its share of the increased business without lessening the 
deposit business of the private banks. The limitation of 
the acceptance of interest-paying deposits by section 13, 
No. 7, of the bank law, appears in any case practically 
superfluous. The Reichsbank ought to see its chief duty, 
however, in the development of the system of payments 
by transfers to, and deductions from, accounts current 
(Giroverkehr) and in the extension of the clearing system. 
If the limitation of the issue of uncovered notes is retained 
according to the present regulations, then there is no 
reason for changing the basis upon which the profits of 
the Reichsbank are divided, as regulated by the law of 
the 7th of June, 1899. In general, the present condition 
of the Reichsbank should be maintained. The notes of 50 
and 20 marks should be retired, for, as was to be ex- 
pected, they have exerted no influence on the gold stock 
of the Bank, and have had a tendency to retard the ex- 
tension of the method of payment by check and to coun- 
teract the efforts for the limitation of note circulation. 



242 



VII 

Concerning the Renewal of the Privilege 

of the Reichsbank, and of the 

Private Note Banks 



By DR. MORIZ STROELL 
Director of the Bayerische Notenbank 



(Article from the Bank-Archiv, 1907, page 311) 



243 



VII.— CONCERNING THE RENEWAL OF THE PRIV- 
ILEGE OF THE REICHSBANK AND OF THE PRI- 
VATE NOTE BANKS. 

Dr. Moriz Stroell, 
Director of the Bayerische Notenbank. 

[Article from the Bank-Archiv, 1907, page 311.] 

The question of the renewal of the privilege of the 
German banks of issue has recently again come to the 
fore. I will endeavor, at the request of the editors of 
the "Bank-Archiv," to present briefly my views with 
regard to this matter. 

So far as the corner stone of the whole fabric of German 
banks of issue, the Reichsbank, is concerned, its continu- 
ance is understood as a matter of course. Without a 
central bank, regulating, by means of the issue of notes, 
the changing needs for means of payment, modern eco- 
nomic life is inconceivable. The organism and extraor- 
dinary expansion of the industrial life of Germany have 
for a generation been bound up with the Reichsbank. 
On this point there can be no difference of opinion. 
And even the differences of opinion concerning the 
form in which the privilege should be renewed are really 
fewer than is frequently believed. Into the discussion 
concerning this question, matters are frequently intro- 
duced which stand in little or no direct connection with 
the Reichsbank and its institutions. 

But to proceed at once to the main point. The institu- 
tions of the Reichsbank have stood the test in every way 

245 



National Monetary Commission 

for decades; and the wise do not willingly disturb tried 
and proven institutions. The Reichsbank has fulfilled its 
duty, from without and from within, and this both in 
normal and in critical times. From without, it has pro- 
tected the German gold standard; within, it has drawn 
over the Empire a splendid network of institutions dis- 
pensing credit and performing monetary transfers. On 
the basis of a flexible note issue these institutions satisfy 
the need for credit at a rate of interest which is now 
higher, now lower, but which is always determined by the 
existing economic conditions, and is never fixed by con- 
siderations other than those pertaining to the public wel- 
fare. In the course of a generation a great nation expe- 
riences many critical and stormy days. The Reichsbank 
has always been the last resort and a thoroughly reliable 
support. I recollect the hard times of the summer of 
1 90 1, which were characterized by a crisis in which finan- 
cial confidence was shaken in an exceptional manner; I 
recall the period of great world-wide strain and stress of 
capital and production which has just passed, with all 
the worrying concomitant phenomena in the sphere of 
credit. The Reichsbank and its far-seeing management 
were always at hand, now supporting and furthering, 
now wisely restraining, now helping and aiding, judging 
the whole German economic situation from the higher 
point of view, and always putting the common good before 
their own interests. We have had collapses of confidence 
and scarcity of money, but, thanks to the Reichsbank, 
we have not had a real money crisis for a generation; 
that is, a time in which circulating medium was not to 



246 



Renewal of Reichsb ank Charter 

be had by pledging good bankable securities. Sad times 
were they, all the same, alike significant for the great list 
of failures, and the terrible economic suffering. More 
than once, I repeat, the Reichsbank has saved a precarious 
situation by its elastic and properly handled issue of 
notes. The Reichsbank with its present constitution is 
recognized and esteemed everywhere throughout the 
whole Empire as the leading credit institution. It has 
become the bank of banks; the central crowning stone of 
the whole economic structure. 

And does such an institution, which supplies so many 
needs and guards against so many failures, need special 
reform? Such a proposition is not altogether obvious. 

What do the reformers desire? Are the old, threshed- 
out questions regarding the amount of capital, the division 
of profits, the private nature of the share holdings, and 
similar questions to be brought up once more for discus- 
sion? We have come to realize that the amount of the 
capital of the great banks of issue, which in their case 
is far more of a guarantee fund than active capital, plays 
no really important role. We likewise realize more and 
more that a state-owned Reichsbank, quite aside from 
important military and political considerations, would be 
drawn year by year into the struggle of the parliamentary 
and political parties. Finally, we know that a great share 
of the earnings of the Reichsbank already flow into the 
Imperial Treasury in various forms, and that this share 
has almost reached the maximum. Or is the Pxichsbank 
to be compelled to accept interest-paying deposits in the 
future, which are only a burden in normal times, and a 



247 



National Monetary Commission 

danger in unquiet times, and in any case, a hindrance 
to the bank? All this can not in my judgment be the 
serious object of the plans for reform. 

Another question appears more worthy of discussion — 
the question, namely, regarding the amount of tax-free 
notes necessary for the Reichsbank. The tax-free quota, 
as is well known, has been increased in the course of time 
by the quotas of private note banks which have renounced 
the right of note issue, as well as by means of the bank law 
of 1899. The latter increase was made with particular 
reference to the increased population. In less well- 
informed circles the opinion is now impregnably intrenched 
that the interest rate of the Reichsbank at any time de- 
pends upon the quantity of tax-free notes. The disad- 
vantage under which many a business man has labored by 
reason of the high interest rates of recent times, together 
with the above-mentioned belief, will perhaps lead to a 
demand for an increase of the tax-free circulation of the 
Reichsbank. But the interest rate is far less dependent 
upon the limitation of note issue than upon the conditions 
of the metal reserve, upon the international movements 
of gold, and upon general economic conditions. The 
Reichsbank is no automatic machine, but an independent 
and intelligently guided institution. Figures are dead 
until the spirit which comprehends the figures gives them 
life. The Reichsbank has discounted at times at a low 
rate in spite of the enormous demands laid upon it, as, for 
instance, in the summer of 1901 . On the other hand, with 
only a moderate circulation it has not hesitated to raise its 
rate, even by fits and starts, when the preservation of the 



248 



Renewal of Reichsb ank Charter 

German gold standard required it. It must, on the one 
hand, warn the public against speculative excesses by 
means of a rise in the discount rate; on the other hand, it 
may not keep the rate at an artificially low level in order 
to prevent the manifestations of unsound economic con- 
ditions from coming to a head. It must establish the 
interest rate after careful consideration of all pertinent 
conditions, and not according to the present quantity of 
tax-free notes. The desire for permanently lower interest 
rates, which is comprehensible from the point of view of 
the individual, can not always be fulfilled, owing to eco- 
nomic considerations. As Michaelis, one of the origina- 
tors of the bank law, said: "The emergency reserve is 
always outside any tax-free limit of note issue, however 
the latter is measured." On these grounds I consider 
altogether unnecessary a further increase of the quota of 
tax-free notes, a move which would indirectly injure the 
imperial finances. If, however, a law should be enacted 
for the purpose, the Reichsbank management might accept 
the grant with very cool thanks, without feeling itself 
really enriched thereby. 

It would be well — although it is more a matter of prac- 
tice than of legislation — if in future the imperial financial 
management, in its dealings with the Reichsbank, would 
exercise a greater restraint with respect to the discounting 
of treasury bills. The status of the Reichsbank is hereby 
injured, and the interests of the business world are un- 
favorably affected. Every central bank of issue has the 
right to be independent of state finance, at least in normal 
times, and the Reichsbank ought to secure this right as far 



249 



National Monetary Commission 

as possible. As a matter of fact, the Reichsbank and the 
Imperial Government do not follow their own interests in 
accepting and discounting treasury bills, but only the de- 
mands of necessity. It is to be hoped that after the com- 
pletion of imperial financial reform, the practice of mak- 
ing such demands upon the Reichsbank, which have been 
generally regarded as an injury to business, will be per- 
manently discontinued. 

What the Reichsbank is especially in need of, a perma- 
nent and considerable increase in its metallic and par- 
ticularly its gold stock, can not be created for it by legis- 
lation, at least not directly. It can be created indirectly, 
perhaps, but only gradually. The insufficient amount in 
troublous times of the gold stock of the bank is undoubt- 
edly a weak point in our economic life. That this weak- 
ness is not rooted in the constitution of the Reichsbank, 
but solely in prevailing conditions, does not change its 
seriousness. Some of the recent bank statements could 
not be viewed without apprehension, because it was easily 
conceivable that with a sudden increase in note circulation 
and a coincident decrease of the metallic stock, the bank 
might be forced to the edge of insolvency by the necessity 
of providing covering for its notes. This would have been 
all the more the case if one had proceeded to reckon the 
depreciated silver in the bank at its real gold value and 
to assign to the greatly increased stock of imperial treas- 
ury notes their negative value as a reserve against note 
circulation. The fear that the flexible and theoretically 
unlimited right to issue notes might become practically 
illusory some day for want of a satisfactory metallic re- 



250 



Renewal of Reichsb ank Charter 

serve is not altogether dispelled when one pauses to con- 
sider the matter somewhat seriously. Inasmuch as 
German business feels no lack of gold, and every day mon- 
etary transactions are richly, almost too richly, saturated 
with gold, all that is needed to remove the above-men- 
tioned difficulty is to divert the gold from those channels 
in which it is too abundant and lead a part of the stream 
into the bank vaults, where the yellow metal has far 
greater functions to perform as the basis of the total 
money and credit circulation than it has in daily exchange. 
Just now, as is well known, a strong movement is on foot 
which plans to economize the circulating medium in vari- 
ous ways and lead it to the central bank for facilitating 
credit business. The efforts toward that end, made by 
the banking world and experts in the matter of coinage, 
have in general no direct connection with the constitution 
of the Reichsbank. Nevertheless, they are frequently 
mentioned in the same breath with it, perhaps because 
their operations are to result for the benefit of the central 
institution. Among such means of economizing gold are 
the following : The regulation and extension of the method 
of payment by check; the introduction of new T clearing 
houses, mortgage-bank clearings, and the like. Of similar 
intent was the law passed more than a year ago, which 
authorized the Reichsbank to issue notes of 50 and 20 
marks. The issue of an imperial treasury note of 10 
marks as a partial substitute for the gold crown also be- 
longs to these schemes. Thus, gold was to be brought 
gradually into the Reichsbank vaults. These means and 
measures have the common characteristic that they do not 



251 



National Monetary Commission 

work quickly, but only gradually, because of the opposing 
customs of business and of the people, and thus require a 
certain lapse of time for their development. It appears to 
many to-day to be a considerable sacrifice to give up, even 
to a certain degree, the use of money or of gold. To be 
told to do this appears to the metal fanatic a sin against 
the German gold standard. The check and the small 
paper note can be forced upon the German citizen who is 
accustomed to using gold only by dint of considerable 
effort. The Austrian, on the other hand, who has now 
become unaccustomed to using gold, has to be coaxed to 
use the brand-new gold pieces in daily business. As in 
other matters, so in those pertaining to the technique of 
currency, men "call custom their nurse." 

Now for the private banks of issue. The bank act of 
1875 rests upon the mixed, federal bank system — that is, 
on the cooperation of the Reichsbank and the private note 
banks. This regulation of the German banking system 
was by no means conceived of as a transitory arrangement, 
as is sometimes asserted, but as a permanent organization, 
corresponding to the federal organization of the Empire. 
The legislative intent was to render possible a credit 
system for the whole Empire, as decentralized and inten- 
sive as possible, under the centralized direction of the 
Reichsbank. The bank act was careful to place the 
destiny of the private banks of issue, which represent the 
federal component in the banking system, exclusively in 
the hands of the Bundesrat (Federal Council) — that is, 
in the hands of that body in which, along with a con- 
scientious regard for imperial needs, the especial interests 



252 



Renew a I of Reichsb ank Charter 

of the individual federal states are protected and repre- 
sented. The note issue of the private banks represents 
part of the federal authority in matters of finance ; and in 
more than one way the finances of the state are closely 
related to the state banks which continue to exist in the 
kingdoms of Bavaria, Saxony, and Wiirttemberg, and the 
Grand Duchy of Baden. The federal idea, which had its 
share in the framing of the fundamental provisions of the 
bank act, demands the future maintenance of a type 
bank, which has stood the test for a generation, and has 
done yeoman service in developing the credit system in a 
large section of the German Empire. No one was in favor 
of a complete monopoly of the Reichsbank in the discussion 
of the renewal of its privilege in 1890 and 1900; and if the 
question were put to-day in those states of the Empire 
where the state banks are active in the full exercise of 
their privileges, whether the institution of a local bank of 
issue is to be sacrificed in favor of an imperial bank 
monopoly, it would undoubtedly, on political and eco- 
nomic grounds, be answered in the negative. 

The great private banks of issue have not acquired such 
an established position in business and such a hold on 
esteem without strenuous efforts on their part. They 
were certainly not borne aloft by the favoring hand of 
legislation, for on every occasion the law was altogether 
partial to the central institution. There was no lack of 
administrative limitations and difficulties of every kind. 
It is no wonder that under the pressure of these circum- 
stances the small private note banks, and even those of 
intermediate rank, were gradually crushed out, and that 



253 



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only the politically and economically important banks 
in the larger states, which could carry on their operations 
over an extended and assured territory, have survived. 
If these banks remain firmly entrenched in the domain 
of credit in their own special realm, they owe it to the 
valuable service which they have rendered and to a proper 
conception of the task imposed upon them by bank 
legislation. 

This task consists in supplementing the activity of the 
Reichsbank by providing for the requirements of local 
credit in all its ramifications and giving the closest atten- 
tion to individual needs. The extension and control of 
the machinery of credit in the smaller cities and business 
centers constitute the main business of the present sys- 
tem of German private banks of issue. Their numer- 
ous branches and agencies operate profitably and with 
facility here, and their activity lowers the interest 
rate. They are in close connection with the local credi 
banks; they discount their bills, and afford in this man- 
ner the advantages of note issue to the small business 
man. The cities in which they are represented have the 
advantage of being bank cities and of being thereby 
included in the great mesh of monetary intercourse. The 
numerous offices in small cities bring credit business into 
regulated channels, and operate for the regulation and 
safety of all business relations. They accustom the 
business communities of even the rural districts to the 
use of checks and the method of payment by means of 
transfers to, and deductions from, accounts current 
known as the "giro" (giroverkehr) , and by adapting 



254 



Renewal of Reichs b ank Charter 

themselves to local and individual conditions serve as the 
pioneers in spreading the knowledge and gradual use of 
modern monetary arrangements. An excellent illustra- 
tion is afforded by the Bayerische Notenbank. This has 
eighty subofhces, and of these forty are in Bavarian 
cities in which neither the Reichsbank nor any other 
large credit institution does business; and these sub- 
ofhces are provided with banking facilities, and carry on 
all kinds of business legally permitted to the bank. 
Similar conditions prevail through the activity of the 
private banks of issue in Saxony, Wiirttemberg, and 
Baden. The private note banks are enabled to perform 
such important and diversified services because they 
work more cheaply than the central bank, and avoid the 
costly apparatus of the Reichsbank. Shall all of these 
lesser cities lose the important advantage of being bank 
cities by the monopoly of the Reichsbank? Or are we to 
believe that the Reichsbank, in its character as a monop- 
oly, would, or could, provide all of these places with 
Reichsbank subofnces? The mere matter of expense 
would, in my judgment, put such a plan entirely out of 
the question. The activity of the private note banks in 
the smaller cities places the sound distribution of credit 
upon many shoulders, and thus constitutes an appreci- 
able and, under certain circumstances, a very grateful 
relief for the Reichsbank. The stable level of the note 
circulation, which fluctuates comparatively little even in 
troublous times, is explained indeed by the utilization of 
the resources afforded by the private banks of issue in 
the smaller cities. The fluctuations and disturbed con- 



255 



National Monetary Commission 

ditions of business in the great financial and commercial 
centers, the elastic regulation of which naturally falls to 
the Reichsbank, are felt but little in the smaller cities. 
To regard the stability of the bank-note circulation as 
indicative of evil influences is therefore to misapprehend 
altogether the activity of the private banks of issue and 
their functions. The objection which was formerly heard 
at times that the private note banks neutralized the 
discount policy of the Reichsbank by underbidding the 
Reichsbank discount rate has ceased to have any force, 
because since 1901 the discount rates of the private banks 
have almost without exception been adapted to those of 
the central bank. If the private note banks, with the 
exception of the Bavarian Bank, have since 1901 loaned 
temporarily below the regular discount rate, these loans 
have not been made through the instrumentality of 
note issues, but mostly out of the superabundant 
original capital- and the deposits. It is not, therefore, a 
question of the abuse of the note privilege. The influence 
of the private note banks on the interest rate has been 
generally overestimated. The private banks of issue, in 
my judgment, by their generally loyal and unobjection- 
able course, have honestly deserved to be treated and 
to be regarded by the Reichsbank, not as inconvenient 
rivals, but as estimable cooperators in the fulfillment of 
a common duty. The matter of the issue of notes by 
private banks has been considered by imperial legislation 
since 1875 as a question of organic economic develop- 
ment. This statesmanlike conception, in which the prin- 
ciple of centralization has certainly not suffered, will 



256 



Renewal of Reichsb ank Charter 

undoubtedly prevent the existing prosperous state banks 
from being cut off before their time by arbitrary legis- 
lative action. 

I therefore declare myself, on the ground of the fore- 
going considerations, in favor of the unconditioned main- 
tenance of the present note-bank system. Not only the 
tried organs of the bank act, the Reichsbank and the 
private note banks, but the whole German business world 
interested in existing banking institutions, are, in my 
judgment, fully justified, and have long been justified, in 
demanding that the banking system, in its fundamental 
features, be constituted a definitive arrangement, and that 
the present periods of renewal be removed, or at least 
lengthened. This desire is justified, though it may be 
unattainable from parliamentary considerations. 

Finally, I would call attention to a point with regard 
to which the bank law does not seem to need a change, 
but does need a supplement of no little importance. This 
concerns the position of the Reichsbank and the private 
banks of issue in case of war. It follows from the posi- 
tion of the Reichsbank as the central bank of issue for 
Germany, that in case of war it must serve the Empire as 
a war bank, in addition to its manifold economic duties. 
In such a situation the metallic stock concentrated in 
the German note banks would be of the utmost impor- 
tance, constituting, as it does, in critical times the main 
support of the whole monetary system. It would mean 
everything, not only during the continuance of the war, 
but still more so in the economic readjustment and finan- 
cial reconstruction later on. Not only the metallic stock 

83703—10 17 257 



National M on et ary Commission 

of the Reichsbank, but also that of the private note 
banks, which consists almost exclusively of gold, should 
be considered in this connection. This national metallic 
stock ought not be scattered or uselessly squandered and 
dissipated in the channels of daily business. It should 
be kept intact for purposes of the public welfare and 
remain sequestered for those purposes. In Schmoller's 
Jahrbtich for 1899 I expressed the opinion in my article 
"Concerning the German Monetary System in Case of 
War" that Germany, in case of a quick, decisive victory, 
would be able to dispense with compulsory monetary reg- 
ulations. The enormously increased monetary demands 
for economic and military purposes in the last decade 
have caused me to change this opinion, because the 
requirements of war might exceed the normal demand far 
more than was formerly believed. It now seems to me 
that no continental state could carry on a great European 
war without a temporary forced currency, because it 
would need its gold treasure as an emergency reserve, 
and foresight urgently demands its concentration for all 
emergencies. The technical inferences drawn from this 
necessity need not be presented here in detail; it is suffi- 
cient to make this brief reference to eventual measures 
in case of war. The provisions of the bank law regard- 
ing bank statements, the redemption of notes, and loans 
upon securities would need, in my judgment, a tempo- 
rary modification for all German banks of issue in case of 
war. It seems to me that it would be expedient to intro- 
duce a clause into the bank law investing the Bundesrat, 
or the Reichsbank, with the necessary authority to make 
these changes. 

258 



Renewal of Reichsb ank Charter 

If the representatives of the German banking world at 
the coming Hamburg convention should take up the 
imperial bank act of the 14th of March, 1875, in their dis- 
cussions they may well pay homage to it and to its authors. 
It is largely to the bank act that Germany owes its pros- 
perity and the assured security of its credit. The German 
financial world will have to admit, however, that the best 
legal institutions are vivified only through the intelligent 
cooperation, the efforts, and the self-restraint of the citi- 
zens. Protective institutions should be utilized in accord- 
ance with the dictates of reason. We must be careful not 
to abuse them by relying blindly on them or demanding 
the impossible from them. Human reason can not be 
replaced by any legal institution, however cleverly devised. 



259 



VIII 

Law of June 1, 1909, Amending 
the Bank Act 



261 



VIII. LAW OF JUNE i, 1909, CONCERNING 
CHANGES IN THE BANK ACT. 

We, William, by the grace of God, German Emperor, 
King of Prussia, etc., ordain, in the name of the Empire 
and with the consent of the Bundesrat and the Reichs- 
tag, the following: 

Article i. 

Section 24 of the Bank Act of the 14th of March, 1875, 
is changed to the following form by the repeal of article 
2 of the law of June 7, 1899. 

The net annual profit of the Reichsbank is to be divided 
at the close of each year in the following manner: 

1. In the first place, a regular dividend of 3^ percent 
of the capital is to be distributed among the shareholders. 

2. After 10 per cent of the balance has been trans- 
ferred to the reserve fund the new balance shall be dis- 
tributed in the proportion of one-fourth to three-fourths 
among the shareholders and the imperial treasury, respec- 
tively. 

If the net earnings are less than $% per cent of the 
capital, the difference is to be made up from the reserve 
fund. 

The premium gained on the sale of Reichsbank shares 
is to be added to the reserve fund. 

Back dividends having a four-year standing after 
maturity are canceled in favor of the Bank. 

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National Monetary Commission 

Article 2. 

Article 5 of the law of June 7, 1899, is amended by the 
following provision: 

The total amount of tax-free uncovered notes to be 
apportioned to the Reichsbank, according to section 9 of 
the Bank Act, including the shares of the banks numbered 
2 to 12, 15 to 17, and 20 to 33, which have accrued to the 
Reichsbank, is to be fixed at 550,000,000 marks, and the 
total note circulation for all the banks is to be raised to 
618,000,000 marks. 

The amount of notes in circulation, according to the 
reports which are submitted at the end of March, June, 
September, and December of each year, for the purpose of 
determining the tax (section 10 of the Bank Act), raises 
the shares of the Reichsbank to 750,000,000 marks, and 
the aggregate circulation to 818,771,000 marks. 

Article 3. 

The notes of the Reichsbank are legal tender. In all 
other respects the provisions of section 2 of the Bank Act 
remains in force. 

Article 4. 

I. In section 18 of the Bank Act the words "German 
currency" are changed to "German gold coins." 

II. Section 19, paragraph 1, of the Bank Act is changed 
to the following form: 

The Reichsbank is required to accept at full face value 
the notes of those banks which are announced by the 
Imperial Chancellor, according to section 45 of this act, 
not only in its main office in Berlin, but also in its branch 

264 



Renewal of Reichsb ank Charter 

offices either in cities of more than 80,000 inhabitants or 
in the city where the bank which has issued the notes is 
located, as long as the issuing bank punctually fulfills its 
duty of note redemption. 

Similarly, the Reichsbank is required to exchange to 
bearer its notes for the notes of each of the announced 
banks in its branch offices which are located in the same 
States where the issuing bank is operating, as far as the 
amount of the notes of these branch offices permit such 
exchanges. 

The notes accepted or exchanged, according to para- 
graphs 1 and 2, may be presented by the Reichsbank 
either for redemption or as payments to the same bank 
which issued them, as well as payments in the city where 
the latter has its principal office. 

Article 5. 

I. In section 8, paragraph 6 (C), of the Bank Act, the 
words "and checks" shall be inserted after "bills." 

II. The following words shall be inserted in section 13 2 
of the Bank Act after "solvent:" "as well as checks 
which are indorsed by not less than two persons known 
to be solvent." 

III. The following words shall be inserted in section 17 
of the Bank Act after " solvent: " " or in checks which are 
indorsed by not less than two persons known to be sol- 
vent." 

IV. In section 32, paragraph 1, of the Bank Act, after 
the phrase "the sale and purchase of gold and bills," the 
words "and checks" shall be inserted. 



265 



National Monetary Commission 

V. The following provision shall be appended to sec- 
tion 47 of the Bank Act: 

Sec. 47 a . With regard to the reserve against the cir- 
culating notes of the private note banks which are exempt 
from the restrictions of section 42, the provisions of sec- 
tion 17 shall be applicable. 

Article 6. 

I. Article 6 of the law of June 7, 1899, is amended as 
follows : 

The following sentence is to be added to section 13 of 
the Bank Act, paragraph 3? — (C), after the words "of 
their exchange value." 

"To these are to be added the bonds of domestic quasi 
public agricultural credit institutions, which are issued 
to bearer, as well as the bonds of the above institutions 
and banks, which are payable to bearer and which are 
issued on the basis of loans granted to a domestic municipal 
corporation or which are guaranteed by such a corporation. ' ' 

II. The following provision is to be inserted under 
figure 9 in section 13 of the Bank Act: 

"9. To issue interest-bearing loans for not longer than 
three months on pledges of the right of claim of debts 
registered in the debit books of either the Empire or one 
of the German States, to the maximum amount of three- 
fourths of the exchange value of the converted debt." 

III. Section 20 of the Bank Act is appended by the fol- 
lowing provisions to be designated as sections 20a and 206. 

Sec. 20a. If the right of claim of debts registered in 
the debit books of either the Empire or one of the German 



266 



Renewal of Reichsb ank Charter 

States (sec. 13, fig. 9) is pledged to the Reichsbank, the 
signatures of the persons, for which the Reichsbank is 
kept responsible according to section 38, are adequate 
for the recording of the pledge in the debit books in the 
name of the Reichsbank. Inasmuch as this latter pro- 
vision requires the signatures of two members of the board 
of directors, the authentication of the application is valid 
when made by other officials of the Reichsbank named 
by the board of directors to the debt administration. 

The provisions of section 183 of the law concerning 
voluntary jurisdiction are applicable to the authentication. 

Sec. 206. If the pledge of the right of claim of debts 
has been registered in the name of the Reichsbank in the 
debit books (sec. 13, fig. 9), the Reichsbank retains the 
right to the pledge even when it has been transferred to 
a third party, unless the right of the latter has been 
recorded in the debit books before the entrance of the 
pledge of the right to the claim or if at the time of regis- 
tration the right of the third party has been either known 
or, save for gross negligence, could have been known to 
the Reichsbank. 

If the debtor does not meet his obligations guaranteed 
by the pledge of the right to the claim, the debt admin- 
istration is authorized and required, upon the written 
request of the Reichsbank, to issue to the latter, with- 
out demanding any proof of the delay on the part of the 
pledger to meet his obligation, certificates of indebted- 
ness to bearer for the whole or a corresponding part of 
the claim, unless such issue is prohibited by judicial 
order or when the right to request such issue or to make 



267 



National Monetary Commission 

other arrangements was recorded in favor of a third 
party prior to the pledge of the right to the Reichsbank. 
The pledge of the right of claims may also be used for 
the purpose of defraying the cost incurred in the issue 
of the certificates of indebtedness. 

The debt administration shall inform the Reichsbank, 
at the time of issuing certificates of indebtedness to the 
latter of the later transfers of the right to the claim. 

The provisions of section 20 stipulate for the compen- 
sation to be demanded by the Reichsbank out of the 
certificates of indebtedness to be issued by the debt 
administration. 

Article 7. 

Section 22 of the Bank Act is to be changed to the 
following provision: 

The Reichsbank is required to take charge of the 
business of the imperial treasury without compensation. 

The Reichsbank is authorized to assume the obliga- 
tion of administering the similar business of the federated 
States. 

Article 8. 

Articles 3, 4, 5, and 6 of this law shall go into effect on 
the 1st of January, 19 10. The other provisions shall 
go into effect on the 1st of January, 191 1. 
Issued over our imperial signature and seal. 
Given at the New Palace, the 1st of June, 1909. 
(Signed) William, 

von Bethmann Hollweg. 



268 



LB N 'iO 



LE N '10 



